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News & Developments

April 12, 2013

California Drilling Barred for Failure to Consider Fracking Impact

The Obama administration recently suffered a setback when a federal judge in California ruled it violated national environmental law by not first conducting a full environmental-impact study before issuing oil and gas leases in the Monterey Formation. The decision by Judge Paul Grewal was issued on March 31, 2013, and requires the parties to either submit a joint plan of action or prepare to argue their cases before any drilling can go forward.

The Monterey Formation in central and southern California is estimated to contain more than 15 billion barrels of oil, or 64 percent of the total U.S. shale-oil reserves. The Interior Department’s Bureau of Land Management leased two tracts of approximately 2,500 acres for oil and gas development in 2011. Environmental groups, concerned that fracking could contaminate local water supplies and pollute the air, urged the court to rescind the leases and force a more thorough environmental review.

While Judge Grewal declined to cancel the leases, he held that the bureau’s analysis was flawed because it “did not adequately consider the developmental impact of hydraulic fracturing techniques . . . in combination with technologies such as horizontal drilling.”

Environmental groups such as the Center for Biological Diversity and the Sierra Club are touting this decision as a milestone in forcing greater scrutiny of fracking. Oil companies, on the other hand, are viewing the ruling as a delay, maintaining that the court ruled against the bureau’s process and not fracking specifically. Regardless, Judge Grewal’s decision and the case’s eventual outcome could have larger implications for a more recent lease of 18,000 acres in the same region, which according to environmental groups, was approved under the same “flawed analysis.”

The case is Center for Biological Diversity v. Bureau of Land Management, No. 11-cv-06174, U.S. District Court, Northern District of California, San Jose Division.

Keywords: energy litigation, fracking, California, Interior Department, Bureau of Land Management, Grewal, Monterey Formation

— Kara Stauffer Philbin, Fernelius Alvarez, PLLC, Houston, TX

April 11, 2013

DOI Contempt Order on Second Post-Macondo Drilling Ban Reversed

On April 9, 2013, the Fifth Circuit released an opinion in Hornbeck Offshore Services v. Kenneth Salazar, No. 11-30936, reversing a contempt ruling against the Department of the Interior (DOI). Following the 2010 Deepwater Horizon explosion and oil spill, the DOI issued a moratorium, prohibiting all new and existing oil and gas drilling operations on the Outer Continental Shelf for six months. The district court enjoined enforcement of this moratorium. The DOI withdrew its original moratorium order, known as the "May Directive," and replaced it with the "July Directive," which continued the suspension of drilling and was the same in scope and substance as the May Directive, albeit with a more thorough explanation of reasons for the moratorium.

Hornbeck Offshore Services, a company that wanted to resume drilling operations and the original plaintiff in the injunction suit, argued that by replacing the May Directive with the July Directive, the DOI had chosen to disobey the district court's order enjoining the moratorium. The district court agreed, concluding that the "plaintiffs have established the government's civil contempt of its preliminary injunction order" by clear and convincing evidence. The Fifth Circuit, however, reversed. The Fifth Circuit noted that the injunction was not as clear and broad as Hornbeck claimed, and instead that the DOI's actions were technically not contemptuous of the injunction "as drafted and reasonably interpreted." The court noted, however, that "Our decision is a narrow one."

— Lauren E. Godshall, Curry & Friend PLC, New Orleans, LA

April 2, 2013

Texas Supreme Court Resolves Risk Allocation vs. Due Diligence

Recently, the Texas Supreme Court harmonized the contractual risk-allocation provisions and the due-diligence requirements found in a contract for pipeline replacement and construction.

El Paso Field Services, L.P. purchased a propane pipeline and then made plans to remove the old pipeline and construct a new pipeline. El Paso invited several contractors to bid on a project to replace a section of the pipeline. In doing so, El Paso hired a third-party consultant to survey and map the pipeline route and issue “alignment sheets” that included locations of “foreign crossings” that included other pipelines, utilities, roads, and other natural and man-made intersections. These alignment sheets were provided to interested contractors in the bid package to assist the contractors in cost and time estimating. Eventually, the contractors completed a contract and offered their respective bids for the project. Subsequently, El Paso awarded MasTec North America, Inc. the bid.

Read the full case note.

— Jon Paul Hoelscher, Coats Rose, Houston, TX

April 1, 2013

UTenn Leads Way on Fracking on University Property

As the debate over fracking continues, the Tennessee State Building Commission voted unanimously on March 15, 2013, to allow the University of Tennessee to move forward with soliciting bids for its hydraulic-fracturing (fracking) plan. The university’s plan allows a private gas company to lease the mineral rights to more than 8,000 acres of university land for the purpose of drilling for natural gas. Environmentalists oppose the plan because they fear that fracking could harm the wildlife and land in the university forest area.

In response to the environmental criticism, the university stressed both the financial and educational benefits of its fracking plan. While the university is unable to place a financial value of the natural gas on the land, it has proposed leasing the land for an initial amount of $300,000 and an additional $300,000 per year, plus 15 percent of all royalties for any natural gas sold. The terms of the lease will be for five years with the option of three five-year renewals—or as long as there is profitable gas production on the land.

The monies raised from leasing the land’s mineral rights will provide significant educational benefits. The successful bidder will lease the mineral rights to a portion of the land, but the university will retain the rights to study the impact fracking has on the area’s wildlife, air quality, and geology. Through its research, the university will monitor the fracking to ensure that safe drilling procedures are used and to make recommendations for minimizing any damage from fracking in the future.

According to university officials, other educational institutions including Vanderbilt University and Virginia Tech are interested in getting involved in the university’s fracking program.

Keywords: energy litigation, fracking, Tennessee

— Eve M. Ellinger, Ice Miller LLP, Columbus, OH, and Travis Oliver IV, Law Offices of Travis Oliver IV, Monroe, LA

February 19, 2013

Judge Accepts BP's $4 Billion Criminal Settlement

On January 29, 2013, a federal judge in New Orleans approved a plea deal between BP and the U.S. Justice Department, which finalized BP’s criminal liability for the 2010 Gulf of Mexico oil spill. Under the agreement, BP will pay $4 billion in fines—the largest criminal resolution in U.S. history—and plead guilty to 14 counts of criminal acts, including felony manslaughter and obstruction of Congress. Had Judge Sarah S. Vance not accepted the plea, the oil giant would have faced a long and costly trial.

While the guilty plea brings BP’s criminal liability to a close, the company still faces the federal government’s civil claims, claims by Gulf Coast residents and businesses, and federal environmental penalties that could total into the tens of billions. If the penalties fall under the Clean Water Act and the Natural Resource Damage Assessment process, BP’s fines could be quadrupled, especially if BP is found to be grossly negligent.

Company attorneys and government officials are now working toward settling civil claims related to the spill, for which the company’s negligence is a key issue. Attorney General Eric H. Holder has publicly stated that the Justice Department is committed to establishing that BP was grossly negligent. BP, however, contends that the accident was in part due to the fault of two of its contractors: Transocean, the rig owner and operator, and Halliburton, the cement contractor on the well. A civil trial to resolve the remaining civil charges is scheduled for February 25, 2013, in New Orleans.

The fallout also continues for BP’s partners. Transocean agreed this month to plead guilty to a misdemeanor charge of violating the Clean Water Act and will pay $1.4 billion in penalties. Halliburton could face criminal charges, but has not reached any deals with the U.S. government. Four current and former BP employees face criminal charges as well and are preparing for trial.

Keywords: energy litigation, BP, Deepwater Horizon, settlement, criminal

— Kim Mai, Haynes and Boone, LLP, Houston, TX

February 1, 2013

Oil Companies Denied Indemnification in WWII Remediation Costs

The U.S. Court of Federal Claims, in Shell Oil Co. v. United States, recently ruled that several well-known oil companies were not entitled to indemnification from the United States in connection with $92 million in remediation costs incurred at a site contaminated with aviation fuel during World War II. Nos. 06–141, 06–1411, 2013 WL 163804 (Fed. Cl. Jan. 14, 2013). In 1942 and 1943, the plaintiffs entered into contracts to manufacture vast quantities of “avgas” to help fuel the nation’s fleet of military aircraft. The manufacturing process, however, generated benzol waste that was disposed of on property now designated as the McColl Superfund site in Fullerton, California. The avgas contracts were terminated at the end of World War II, and the hazardous waste began oozing from the ground decades later.

Read the full case note.

Keywords: energy litigation indemnification, remediation, avgas, CERCLA, Anti-Deficiency Act

— Tyler L. Weidlich, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA

January 31, 2013

"Billions" Paid to Landowners in Natural-Gas Royalties

A recent estimate by the National Association of Royalty Owners (NARO) approximates that some $21 billion in royalties were paid to landowners by oil and gas companies in 2010. In Pennsylvania alone, natural-gas royalty payments to landowners could exceed $1.2 billion for 2012 according to an estimate by the Associated Press in a recent article. The same article quotes one local farmer, in particular, who was living paycheck to paycheck prior to shale-gas development on his property.

Underlying the litigation and regulation surrounding fracking, is the fact that per the AP article, as a direct result of the deemed controversial fracking and horizontal drilling, billions of dollars are being paid to private landowners, farmers, and individuals. That says nothing of the benefits to the oil and gas producing states in terms of job creation and infrastructure investment, amounting to a 2.8 percent increase in GDP in North Dakota in 2011 and “tens of billions” invested in Pennsylvania in recent years.

As a result of this increased development, NARO, a landowner and royalty-owner organization that began in an effort to curb federal taxes on oil and gas production, has seen a marked rise in membership over the past five years. Given the annual increases in year-over-year production of natural gas and oil, a trend that is projected to continue long into the future, the annual royalties paid to landowners are expected to only increase. A result that would likely further grow the memberships of royalty-owners associations, several of which are generally in favor of further oil and gas development and, in the case of NARO, “the right to freely own and develop” resources.

At a time when the safety and consequences of fracking are constantly called into question, with firmly entrenched arguments on both sides of the debate, the billions paid to landowners and individuals represent one of the few uncontested effects of fracking and shale oil and gas development, an effect that is projected to have an upward trend for years to come.

Keywords: energy litigation, landowners, royalties, development, fracing, fracking

— Austin Elam, Haynes and Boone, LLP, Houston, TX

January 24, 2013

Texas Appeals Court Allows "Pass Through" Indemnity

A Texas Court of Appeals recently addressed the enforceability of an indemnity agreement in the context of a master services agreement (MSA) with an oilfield services contractor. Under Texas law, indemnity provisions are valid and enforceable if they satisfy two fair-notice requirements: (1) the express-negligence doctrine; and (2) the conspicuousness requirement. Indemnity provisions related to a well or a mine are further subject to the Texas Oilfield Anti-Indemnity Act (Chapter 127 of the Texas Civil Practice and Remedies Code) if they purport to indemnify an indemnitee for the indemnitee’s negligence.

In Tutle & Tutle Trucking v. EOG Resources, Inc., 2012 WL 5695585 (Tex. App-Waco Nov. 15, 2012, no pet. h.), EOG Resources, Inc. hired Tutle & Tutle Trucking, Inc. as a contractor under an MSA. A Tutle employee was injured by the alleged negligence of Frac Source, another contractor hired under a similar MSA with EOG. The injured employee sued Tutle and Frac Source but did not sue EOG. Frac Source demanded that EOG defend and indemnify it from the employee's claim pursuant to the EOG-Frac Source MSA, and EOG demanded that Tutle defend and indemnify EOG pursuant to the EOG-Tutle MSA.

Read the full case note.

Keywords: energy litigation, indemnity, pass through, fair notice, express negligence, conspicuousness, Texas Oilfield Anti-Indemnity Act

— Paul Russell, Haynes and Boone, LLP, Houston, TX

January 23, 2013

Texas Court Requires Precise UCC Filing

As investment in the domestic oil and gas exploration and development industry continues at a rapid pace, it is especially important to ensure that creditors have completed all necessary steps to secure their loans. A recent Texas case—CNH Capital America LLC v. Progreso Materials Ltd., 2012 WL 5305697 (S.D. Tex. Oct. 25, 2012)— emphasizes the importance of filing under the correct debtor name with respect to personal property, equipment, fixtures, and as-extracted collateral (i.e., hydrocarbons out of the ground).

CNH Capital involved the financing of two pieces of equipment, an Ahern asphalt plant and a Kawasaki wheel loader. The plaintiff, CNH Capital America, LLC, financed the purchase of both pieces of equipment and alleged that the original buyers were Hugo Martinez and Progreso Materials, Ltd.. CNH further claimed that Progreso and Martinez had granted a security interest, which CNH had properly perfected.

Read the full case note.

Keywords: energy litigation, UCC, financing statement, creditor

— Kim Mai, Boone, LLP, Houston, TX

January 16, 2013

D.C. Circuit Reigns in the EPA

A divided three-judge panel of the D.C. Circuit Court decided in August 2012 the controversial decision of EME Homer City General LP v. Environmental Protection Agency, et al., 696 F.3d 7 (Fed. Cir. Aug. 21, 2012). Without weighing in on the merits of the Environmental Protection Agency’s (EPA) Transport Rule (which regulates pollutant emissions of upwind states), Judge Kavanaugh, who wrote the opinion for the court, found that the Transport Rule exceeded the EPA’s authority. EME, 696 F.3d at 11–12. Judge Griffith joined Judge Kavanaugh in the opinion, while Judge Rogers dissented.

Congress took on the challenge of addressing air quality in the United States by implementing a federalism-based system of air pollution control under the Clean Air Act. Id. at 11. The system takes a balanced approach, allowing the EPA and states to work together to deal with the complex regulatory challenge. Congress directed that the EPA can set air-quality standards for pollutants, and that the states have the primary responsibility for determining how to meet those standards by regulating emission sources within the state.

Read the full case note.

Keywords: energy litigation, EPA, Transport Rule, Clean Air Act, Federal Implementation Plans, air quality, air pollution

— Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P. Houston, TX

January 3, 2013

EPA Releases Update on Ongoing Fracking Study

In December 2012, the EPA released an update on its ongoing study of hydraulic fracturing, or “fracking.” The study, commissioned by Congress in 2010, is looking at fracking’s impact on drinking water. It will not look at the effects of injecting wastewater deep underground, which some critics claim causes small earthquakes and threatens water supplies. The study so far has examined samples from five sites in Colorado, North Dakota, Pennsylvania, and Texas. The studies in North Dakota, Pennsylvania, and Texas are in shale plays and were chosen because they had experienced well blowouts that leaked fracking fluids or because area homeowners had complained about the decline in the quality of the drinking water.

The update on the study does not offer conclusions as of yet but instead outlines the issues to be explored. The study will look at the impact of the following:

The EPA also announced several changes to the study’s research plan since the publication of the initial study plan. It now plans to use and analyze data gathered in FracFocus, a new national registry of chemicals used in fracking that was jointly commissioned by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission in 2011. The original study plan also identified DeSoto Parish, Louisiana, within the Haynesville Shale, as a site for case study. Due to scheduling conflicts, though, this site will no longer be a party of the study. The EPA will also no longer conduct high-throughput screening assays of certain chemicals used in fracking or detected in flowback and produced water, per the recommendations of the EPA’s Science Advisory Board. Finally, because the Department of Energy is already studying the interactions between fracking and various rock formations, the EPA has decided not to look at this issue. Thus the study will no longer look at (1) how fracking fluids might change the fate and transport of substances in the subsurface through geochemical interactions and (2) the chemical, physical, and toxicological properties of substances in the subsurface that may be released by fracking.

The EPA does not expect the study to be completed until 2014.

— Courtney Scobie, Ajamie LLP, Houston, TX

January 2, 2013

EPA Administrator Jackson Stepping Down in January

Lisa Jackson, the administrator of the Environmental Protection Agency (EPA) since 2009, will be stepping down in January following President Obama’s State of the Union address. She did not give any reason for her pending resignation other than to spend more time with her family and to seek new opportunities. President Obama has not nominated a new administrator yet, but her deputy administrator, Robert Perciasepe, has been mentioned as a possible successor.

Jackson’s most significant action as EPA administrator has been drafting new clean air regulations, including the country’s first regulations on greenhouse gases in response to climate change concerns. She faced significant criticism from industry and congressional Republicans for attempting to impose greenhouse-gas regulations. She and the White House were unable to win congressional support for broad-based climate-change legislation, which led to the EPA drafting its own regulations. Those regulations were upheld by the D.C. Circuit in June 2012. Jackson also oversaw new regulations governing mercury emissions from industrial sites and negotiated stricter fuel-efficiency standards with the automobile industry.

Jackson’s successor will oversee the implementation of a number of greenhouse-gas-emissions regulations that have yet to be implemented, including performance standards for existing power plants and refineries, final rules for cooling water used by power plants, and rules for disposal of ash from coal-fired generating plants. The next EPA administrator will also likely work on issues related to hydraulic fracturing, or fracking, including the completion of a long-term study on fracking’s effects on drinking water.

— Courtney Scobie, Ajamie LLP, Houston, TX

January 2, 2013

DOJ and SEC Jointly Release New Guide to the FCPA

In November 2012, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) jointly released A Resource Guide to the U.S. Foreign Corrupt Practices Act, which provides a detailed analysis of the Foreign Corrupt Practices Act (FCPA) and provides guidance on the DOJ’s and SEC’s approach to enforcement of the act. Much of the guide is a synthesis of previous decisions and releases from the DOJ and the SEC. The guide summarizes the major provisions of the FCPA and other anti-corruption laws, including the anti-bribery and accounting provisions of the FCPA; provides information on the various consequences an individual or a company can face for an FCPA violation; and describes the various resolutions the SEC or the DOJ may reach when investigating a possible FCPA violation.

The longest chapter in the guide, “Guiding Principles of Enforcement,” discusses what both the DOJ and SEC review when considering investigating a possible FCPA violation or bringing FCPA charges. Like the rest of the guide, this chapter is synthesis of previous pronouncements by the DOJ and SEC, including U.S. Attorney’s Manual, the U.S. Sentencing Guidelines, and the SEC’s Seaboard Report on enforcement proceeding against companies. The chapter also reiterates that both the DOJ and the SEC look favorably at individuals and companies who voluntarily report violations and who cooperate with the authorities.

“Guiding Principles of Enforcement” also includes a detailed description of what the government considers an effective corporate-compliance program. According to the guide, the three basic questions the DOJ or the SEC asks when considering whether a company has an effective compliance programs are whether the program is well designed, whether the program is applied in good faith, and if it works. The presence of the following elements indicates an effective FCPA compliance program:

The guide was co-written by the Criminal Division of the DOJ and the Enforcement Division of the SEC.

— Courtney Scobie, Ajamie LLP, Houston, TX

January 2, 2013

Final Approval Given to Partial Settlement in Deepwater Horizon Suit

On December 21, 2012, the Eastern District of Louisiana, the court overseeing the multi-district litigation concerning the April 2010 Deepwater Horizon explosion, gave its final approval to a partial settlement between BP and thousands of plaintiffs affected by the ensuing oil spill. The settlement covers property damages and economic losses suffered by people and businesses along the Gulf Coast who suffered real property damages and business losses. BP estimates that the settlement is worth $7.8 billion. However, there is no cap on potential settlement claims other than the $2.3 billion settlement for seafood-related claims for commercial fishermen.

Judge Carl Barbier gave his initial approval in May 2012, which prompted numerous plaintiffs to opt out of the settlement to pursue their claims individually. Many of the objections to the agreement were filed by people or businesses excluded from the agreement or from fishermen who contend they will not be compensated enough for their lost catches. Judge Barbier has not ruled yet on a medical settlement that BP has already reached with the plaintiffs.

The settlement agreement contains a number of reservations and exclusions. It reserves the plaintiffs’ claims against Transocean, the owner of the Deepwater Horizon rig, and Halliburton, the manufacturer of the cement casings on BP’s Macondo well. The agreement excludes the claims of financial institutions, financial funds and vehicles, casinos, insurance entities, the oil and gas industry, real-estate developers, private plaintiffs in parts of Florida and Texas, and residents and businesses claiming harm from the Obama administration’s moratorium on deep-water drilling prompted by the spill. The agreement reserves those claims, along with any claims for bodily loss and derivative claims for BP shareholders. The agreement also does not apply to the federal government’s claims against BP or those of the states of Louisiana and Alabama. The court retained jurisdiction over any matters and disputes arising out of the settlement agreement.

Judge Barbier’s 125-page opinion provides a description of the settlement agreement, including who is eligible, the claims covered, the geographic area and time period covered by the settlement, how the settlement amounts are calculated, the mechanics of filing a claim under the settlement, and an analysis of the fairness of the settlement. Judge Barbier analyzed the settlement under Rule 23 governing class actions. He concluded the plaintiff class satisfied the certification requirements under Rule 23(a); that common factual and legal issues predominated over individuals ones; that a class action was the best way to adjudicate the controversies presented in this matter; and that the settlement was “fair, reasonable, and adequate” under Rule 23(e). Judge Barbier noted that the amount of time the parties spent crafting the settlement, the relatively low number of potential plaintiffs opting out of the settlement, and the fact that litigation would take years to resolve all favored approval of the settlement.

A bench trial is set for late February to determine liability and apportion fault among BP, Transocean, and Halliburton.

— Courtney Scobie, Ajamie LLP, Houston, TX

December 26, 2012

NSR Program Approval; Historic CAA Settlement

The calendar year may be wrapping up, but the Environmental Protection Agency’s (EPA) Region 6 is staying busy. On December 18, 2012, the agency issued a press release detailing its proposal to approve Arkansas’ program for permitting new facilities that will emit significant amounts of greenhouse gases. If approved, the state’s program would replace a federal plan that had been in place since January 2011. Final approval would provide Arkansas with authority to issue New Source Review (NSR) Prevention of Significant Deterioration (PSD) permits governing greenhouse-gas emissions and establish appropriate emissions levels for new or heavily modified sources of greenhouse-gas emissions. The press release noted that, “While the EPA believes states are best positioned to regulate GHGs, the agency has been the GHG permitting authority in Arkansas since the state did not have such a program in place,” and that “[t]he State of Arkansas and EPA worked together to develop the state’s permitting program as a replacement for the federal plan.” The EPA’s proposed approval will be published in the Federal Register in seven to 10 days and will be available for public comment for 30 days.

Also, in Region 6, the EPA and Louisiana Generating, an electric-generating company owned by NRG Energy, Inc., entered into a consent decree with regard to the Big Cajun II coal-fired power plant in New Roads, Louisiana, which will result in the elimination of over 27,300 tons of harmful emissions per year. The settlement, field on November 21, 2012, will require Louisiana Generating to spend approximately $250 million to reduce air pollution, pay a civil fine of $3.5 million, and spend $10.5 million on environmental-mitigation projects. Half of the civil penalty—$1.75 million—will be allocated to the state of Louisiana. The settlement arises out of a 2009 lawsuit in which the Justice Department sued NRG Energy, alleging that the Big Cajun II power plant had operated since 1997 without any update to its air-pollution controls.

Louisiana Generating will reduce its emissions through a combination of new pollution controls, natural-gas conversion, and annual emission caps at all three units at the Big Cajun II plant. Emissions of sulfur dioxide will be reduced by approximately 20,000 tons, and nitrogen oxides by about 3,300 tons. Also, $10.5 million will be spent on various environmental-mitigation projects, including installing solar panels at local schools and government buildings, forestry and wetlands restoration, and funding the installation of charging stations for electric vehicles in the South Louisiana area.

The settlement marks the federal government’s 24th settlement under its national enforcement initiative to reduce emissions from coal-fired power plants under the Clean Air Act’s (CAA) New Source Review requirements, and, according to the EPA’s press release, is the largest CAA settlement in Louisiana history.

Keywords: energy litigation, EPA, NRG, Louisiana Generating, greenhouse gas, Clean Air Act, Big Cajun II

— Lauren E. Godshall, Curry & Friend PLC, New Orleans, LA

November 16, 2012

BP to Pay Largest Criminal Penalty in U.S. History

The April 20, 2010 explosion of the Deepwater Horizon rig owned by BP Exploration and Production Inc. is making record numbers. Not only did the explosion cause what has been dubbed “the worst off shore spill in U.S. history” and kill 11 people, but BP has now agreed to pay the largest criminal penalty in U.S history to settle claims brought by the U.S. Department of Justice: $4 billion.

On November 15, 2012, Attorney General Eric Holder announced that BP will pay the $4 billion in criminal fines and penalties to settle 11 criminal counts of felony manslaughter, one count of felony obstruction of justice, and misdemeanor violations of the Clean Water and Migratory Bird Treaty Acts. This $4 billion penalty beats the record formerly held by Pfizer Inc., which paid a $1.3 billion fine in 2009 to settle claims of marketing fraud related to its Bextra pain medication. 

BP also agreed as part of its guilty plea to retain a process-safety and risk-management monitor and an independent auditor, who will oversee BP’s process safety, risk management, and drilling-equipment maintenance with respect to deepwater drilling in the Gulf of Mexico. BP will also be required to retain an ethics monitor to improve BP’s code of conduct for the purpose of seeking to ensure BP’s future candor with the U.S. government.

BP is not done with actions related to the Deepwater Horizon explosion. The U.S. government and more than 100,000 private plaintiffs will continue to pursue civil actions against BP and other defendants to recover civil penalties under the Clean Water Act and hold defendants liable for natural-resource damages under the Oil Pollution Act. A trial on liability matters is scheduled to begin in February 2013, during which the United States will seek to establish that the spill was caused by BP’s gross negligence. BP estimates that the civil actions will cost more than $7.8 billion to resolve.

BP’s last major settlement was with the U.S. Department of Justice in 2007, when it paid about $373 million to resolve three separate matters: a 2005 Texas refinery explosion, an Alaska oil pipeline leak, and fraud for conspiring to monopolize the U.S. propane market.

Outstanding issues remain as to how the projected $4 billion in settlement funds will be split amongst the areas of the gulf coast affected by the spill. And how Transocean Ltd., owner of the Deepwater Horizon vessel, and Halliburton Co., which provided cementing work on the well, will settle the separate liability charges that have been brought against them.

Keywords: energy litigation, BP, Deepwater Horizon, oil spill, Department of Justice

— Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P. Houston, TX

November 1, 2012

Texas Court to Rule on Seizure of Private Land for XL Pipeline

The issue of whether TransCanada may take immediate possession of privately owned land while the property owner challenges the taking was submitted to the Texas Ninth Circuit Court of Appeals on October 30, 2012. The case, In re TransCanada Keystone Pipeline, LP, Case No. 09-12-00496-CV, is one of many pending suits by TransCanada against East Texas landowners.

The issue is whether TransCanada can take private property as a “common carrier” under Texas statute. Under the current rules, administered by the Texas Railroad Commission, pipeline operators seeking access to private land through eminent domain must show that they are a “common carrier,” which means that they transport natural resources in the public’s interest. To become a common carrier, though, all a pipeline company must do is tell the commission that it is one; the process involves little more than filling out a one-page form.

In March of this year, however, the Texas Supreme Court cast doubt on how pipeline companies acquire right of way. In Texas Rice Land Partners ltd. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192 (Tex. 2012), the court held that pipeline companies must prove that they are common carriers before taking possession. Despite the Supreme Court’s pro-landowner ruling, however, lower courts have yet to apply that decision to prohibit TransCanada from taking immediate possession pending litigation. In the past few months, courts in Lamar and Jefferson Counties have allowed TransCanada to take possession of easements across private lands while its condemnation suits are pending. The Ninth Circuit’s decision will be the first appellate court ruling on this issue since Denbury, and will likely shape the course of litigation in condemnation lawsuits concerning the XL Pipeline.

Keywords: energy litigation, TransCanada, common carrier

— Ryan T. Kinder, Coats Rose Yale Ryman & Lee, PC, Houston, TX

November 1, 2012

ExxonMobil's $65 Billion Alaskan LNG Project Approved

The U.S. Army Corps of Engineers recently approved ExxonMobil’s plans to fill in more than 200 acres of wetlands to proceed with its natural-gas extraction and export project on Alaska’s northern border.

The approval process provides Exxon with a permit to begin developing Point Thomson, thought to be the second-largest natural-gas field in Alaska. The reserve is estimated to contain eight trillion cubic feet of gas and hundreds of millions of barrels of condensate and oil. It is located 60 miles east of Prudhoe Bay and is part of the North Slope. According to Exxon, the North Slope is thought to hold more than 35 trillion cubic feet of discovered natural gas.

The permit approval comes after an in-depth three-year review by the Army Corps that included exploration and consideration of five alternatives for the project. The considerations were time-consuming because the plans included both coastal and inland infrastructure. Exxon plans to fill in approximately 267 acres of wetlands on the navigable waters of the North Slope that lead out to the Beaufort Sea. The Army Corps believes this plan will be the “least environmentally damaging practicable alternative.” The permit contains several conditions to minimize adverse impacts to the environment, including payment of a mitigation fee to the Army Corps’ conservation fund.

This construction will ultimately serve the Alaska Pipeline Project, which is a joint venture between Exxon and TransCanada Corp. The Alaska Pipeline will provide a commercial avenue to the vast resources of the North Slope. These projects will create a significant impact on local Alaskan economies and will likely create numerous legal issues related to the construction and maintenance of these facilities.

Keywords: energy litigation ExxonMobil, Alaska, North Slope, natural gas, LNG

— Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX

November 1, 2012

Legislation Seeks to Quash Tax Benefits for Oil Spill Penalty Payments

U.S. Representative Jo Bonner (R-Alabama) recently introduced a bill that would bar BP PLC from getting a tax break for payments made in connection with the 2010 Deepwater Horizon oil spill. Bonner pointed to media reports that suggest that the U.S. Department of Justice (DOJ) and BP were close to striking a multibillion-dollar settlement to resolve Clean Water Act (CWA) claims related to the spill. Bonner's bill, H.R. 6579, seeks to amend the IRS code to "deny any deduction for compensatory payments made to any person or governmental entity on account of the April 20, 2010, explosion on and sinking of the mobile offshore drilling unit Deepwater Horizon."

Lawmakers are also concerned that any settlement agreement might allow BP to pay a large portion of penalties under the Oil Pollution Act instead of the Restore Act. The Restore Act stipulates that 80 percent of fines levied against a company under the CWA would go toward economic and environmental restoration of the areas affected by the violations. In this case, if BP were fined under the CWA, 80 percent of the fines would go to the five Gulf Coast states affected by the spill. By allowing the DOJ and BP to stipulate how the fines are levied, there is concern that BP might be allowed to pay a large portion of its fines under the Oil Pollution Act, which is not governed by the Restore Act. If BP were to pay its fines under the Oil Pollution Act rather than the Clean Water Act, less money from the fines might ultimately find its way to the five states most affected.

Keywords: energy litigation, BP, Deepwater Horizon, oil spill

— Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX

October 26, 2012

Utah Joins List of States Requiring Disclosure of Fracking Fluids

Utah’s Oil, Gas and Mining Board unanimously voted to approve a new rule that requires companies to identify and report the type and amount of chemicals used in hydraulic fracturing (fracking) at any Utah oil and gas well. The board will now require companies to report this data to FracFocus, which is managed by the Ground Water Protection Council and Interstate Oil and Gas Compact Commission and is funded by the U.S. Department of Energy. The mandatory reporting will take effect November 1, 2012. Companies will have 60 days from completion of a fracking job to report the information and disclose it to the public.

Utah joins seven other states, including Colorado, Louisiana, Montana, North Dakota, Oklahoma, Pennsylvania, and Texas, using FracFocus to meet state disclosure rules.

Fracking involves the injection of fluids, often composed of sand, water, and other chemicals, into a well to fracture shale rock formations. This allows new cracks to open in the formation and makes once inaccessible oil and gas accessible. Fracking has been used for years, but has become a fixture in unconventional oil and gas plays throughout the world over the last decade.

Landowners and environmental groups blame fracking for contaminating groundwater and causing earthquakes. Hollywood has also made movies about the practice and its alleged environmental effects.

The Bureau of Land Management and U.S. Environmental Protection Agency are conducting studies of fracking in an effort to potentially create federal regulations for fracking. Many state agencies feel that, due to the differences in environment and geology among the states, regulations related to fracking should be left to each individual state’s prudence.

Keywords: energy litigation, fracking, FracFocus, Utah

— Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX

August 31, 2012

New Mex. High Court Favors Oil/Gas Companies in Royalty Dispute

The New Mexico Supreme Court recently ruled in favor of ConocoPhillips Co. and Burlington Resources Oil & Gas Co. in a dispute over the calculation of royalties owed for production on state land.

The lawsuit addressed the interpretation of royalty clauses contained in statutory lease forms established by the state in 1931 and 1947. Both lease forms specified that royalties were to be calculated as a percentage of “net proceeds” resulting from the sale of oil and gas. However, the commissioner for the State Land Office took the position that the state leases prohibit lessees from deducting post-production costs necessary to prepare oil and gas for the market in calculating royalties. The improper deductions for post-production costs, according to the commissioner, resulted in ConocoPhillips underpaying royalties by approximately $18.9 million and Burlington Resources underpaying by approximately $5.6 million.

ConocoPhillips and Burlington Resources filed suit seeking a declaration that the State Land Office’s assessments constituted a deprivation of due process, an unconstitutional impairment of contract, and breach of contract. They also claimed that the commissioner had exceeded his constitutional and statutory powers and had usurped the state legislature by seeking royalty payments pursuant to calculations not authorized by law. The commissioner, in turn, counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of the implied covenant to market.

The New Mexico Supreme Court addressed four interlocutory rulings granting summary judgment in favor of ConocoPhillips and Burlington Resources. In the first order, the district court granted summary judgment regarding the interpretation of three lease provisions, finding that (1) the “net proceeds” language in the leases allowed the lessees to deduct post-production costs incurred in selling oil and gas, (2) field and plant fuel are post-production costs under the “free use” clauses and are not subject to royalty payments, and (3) the lessees are required to pay royalties on drip condensate only to the extent they derive profits from such use. In the second order, the district court interpreted the “maximum price” clause in the 1947 lease to require royalties based on the maximum market price in the field or area if “such action is necessary to the successful operations of the lands for oil or gas purposes.” In the third order, the district court ruled that the cost of post-production services provided by the lessees’ affiliate companies is deductible to the extent it is “reasonable.” Finally, in the fourth order, the district court dismissed the commissioner’s claim for breach of the implied covenant to market on grounds that the lessees are permitted to net costs associated with marketing oil and gas because their royalty obligation is premised on “net proceeds.”

The district court certified the rulings for interlocutory appeal, and the court of appeals then certified the appeal to the New Mexico Supreme Court as a matter of “substantial public interest.” The New Mexico Supreme Court accepted the certification and affirmed all four district court rulings.

The case is ConocoPhillips Co. and Burlington Resources Oil & Gas Company, L.P. v. Patrick H. Lyons, Commissioner of Public Lands of the State of New Mexico, No. 32,624 (Aug. 24, 2012).

Keywords: energy litigation, ConocoPhillips, Burlington Resources, Commissioner of Public Lands, New Mexico

— Tyler L. Weidlich, Baker Donelson Bearman Caldwell and Berkowitz, PC, New Orleans, LA

August 30, 2012

TX Court Dismisses Oil/Gas Interlocutory Appeal, Allows Mandamus

The Texas Second Court of Appeals, in Lipsky v. Range Production Co., No. 02-12-00098-CV, recently dismissed a contamination lawsuit against Range Resources Corp. in which various landowners alleged that the company’s operations in the Barnett Shale contaminated a water well. The landowners claimed that Range Resources’ operations had contaminated the well to the extent that it was flammable and, in fact, circulated a video to the media showing flames shooting from the well.

The plaintiffs also filed related complaints with the state’s railroad commission and the U.S. Environmental Protection Agency (EPA). In response, the EPA issued an emergency order to require Range Resources to immediately deliver potable water to local residents, and filed an administrative action against the company to clean up the contamination. However, the EPA eventually withdrew the action.

Range Resources, in turn, counterclaimed for defamation and business disparagement, alleging that the plaintiffs’ complaint to the EPA regarding gas contamination was a fabrication and also that the plaintiffs ignited a gas vent on fire (not well water) in the video circulated to the media. The plaintiffs then moved to dismiss the counterclaim under the state’s anti-strategic-lawsuits-against-public-participation statute. The motion was denied by the trial court, and the plaintiffs appealed the decision.

The court of appeals dismissed the plaintiffs’ appeal for lack of jurisdiction. Citing the recent decision of Jennings v. Wallbuilder Presentations, Inc., No. 02-12-00047-CV, 2012 WL 3500715 (Tex. App.-Fort Worth Aug. 16, 2012), the court held that “we do not possess jurisdiction over an interlocutory appeal from a trial court’s timely-signed order denying a motion to dismiss under section 27.003 of the civil practice and remedies code.” Nevertheless, the court allowed the plaintiffs to challenge the trial court’s ruling via a mandamus proceeding, which is a procedural tool that authorizes a court of appeal to hear a case over which it otherwise could not exercise jurisdiction. The court then granted the parties a couple of weeks to file briefs in the mandamus action.

Keywords: energy litigation, EPA, Range Resources, Barnett Shale

— Tyler L. Weidlich, Baker Donelson Bearman Caldwell and Berkowitz, PC, New Orleans, LA

August 20, 2012

6th Cir. Vacates EPA's Final Determination of "Adjacent" Facilities

The Sixth Circuit recently released its decision in Summit Petroleum Corp. v. EPA, Nos. 09-4348 and 10-4572 (August 7, 2012), in which it remanded the case to the Environmental Protection Agency (EPA) to determine whether a sweetening plant and certain sour-gas wells operated by Summit Petroleum Corporation are sufficiently physically proximate to be considered “adjacent” within meaning of Title V of the Clear Air Act. If the facilities are deemed adjacent, they constitute a “major source” of air pollution and would require a Title V operating permit.

Taken separately, the plant and the wells do not emit enough nitrous oxides and sulfur dioxides for either to constitute a major source. However, multiple pollutant-emitting activities can be aggregated together as a single stationary source if they meet three criteria: (1) they are under common control; (2) they are located on one or more contiguous or adjacent properties; and (3) they belong to the same major industrial grouping. Summit did not dispute application of the first and third criteria. However, Summit disputed that the wells and the plant were located on adjacent properties because the wells are located over 43 square miles at varying distances from the plant, and Summit also stressed that it does not own the property between individual well sites or between the plant and the wells.

The EPA, after over four years of review, issued a final determination that the plant and the wells were adjacent, focusing on the functional relationship between the two activities. The agency argued that the term “adjacent” was ambiguous, and therefore, its determination was entitled to deference from the court.

The court agreed with Summit that the EPA’s “determination that the physical requirement of adjacency can be established through mere functional relatedness is unreasonable and contrary to the plain meaning of the term ‘adjacent.’” In doing so, the court looked to the dictionary meaning of “adjacent” and found that two entities are adjacent when they are “close to; lying near . . . [n]ext to, adjoining.” As the amicus brief in the case highlighted, the EPA’s interpretation of the term “adjacent” focusing on functional relatedness would lead to absurd consequences in the oil and gas industry where nearly every facility is connected by pipeline.

Keywords: energy litigation, EPA, Sixth Circuit, Adjacent

— Sarah Casey, Baker Donelson Bearman Caldwell & Berkowitz, PC, New Orleans, LA

August 20, 2012

Louisiana Amends Risk Fee Statute to Shift Royalty Obligation

On June 6, 2012, the governor of Louisiana signed Act 743 amending two sections of the Conservation Code, including Louisiana Revised Statute Section 30:10, commonly referred to as the Louisiana Risk Fee Statute. Among other things, Act 743 adds several provisions addressing the obligation of a drilling owner to pay royalties (and overriding royalties) owed by non-participating interest owners to others.

The Louisiana Risk Fee Statute seeks to allocate the risk of drilling certain wells as between "drilling" owners and "non-drilling" owners. Under the Risk Fee Statute, when a non-drilling owner has been sent a risk-fee notice by a drilling owner and has elected not to participate in the risk and expense of drilling, the drilling owner may recoup the costs to be borne by the non-drilling owner from the non-drilling owner's share of unit production, plus a risk fee of 200 percent of such tracts’ allocated share of the cost of drilling, testing, and completing the well.

The Risk Fee Statute, in its current form and as reenacted, provides that notwithstanding the risk-fee provision, "the royalty owner and overriding royalty owner shall receive that portion of production due to them under the terms of the contract creating the royalty." Both state and federal Louisiana courts have previously interpreted this provision to mean that the nonparticipating owner, as the contracting party, is responsible for paying the royalties (and overriding royalties) owed to its royalty interests, even though the nonparticipating owner is not receiving any part of production revenues. Act 743 effectively overrules that jurisprudence, at least in part.

The new statute provides that during the recovery period—the period of time during which the drilling owner withholds from production the actual reasonable expenditures incurred in drilling, testing, completing, equipping, and operating the well—the drilling owner must pay the royalty to the nonparticipating owner, and the risk fee is not assessed against those amounts. The drilling owner's obligation is determined, as a basic matter, by the terms of the contract or agreement between the nonparticipating owner and the royalty interest(s) as "reflected of record at the time of the well proposal." The drilling owner's royalty payment obligation ceases once it recovers the actual well costs and risk charge.

In addition to requiring the drilling owner to foot the royalty bill during the recovery period, the reenacted and amended Risk Fee Statute affords certain judicial remedies to an aggrieved royalty interest(s) for nonpayment. Most significantly, the new statute recognizes a cause of action for damages on behalf of a nonparticipating owner against a non-paying drilling owner. Subject to certain notice requirements and a time period for corrective measures to be taken by the drilling owner, a drilling owner who fails to make payment of the royalties or state a reasonable cause for its failure may be liable to the nonparticipating owner for double the amount of royalties due, interest on that sum from the date due, and a reasonable attorney fee "regardless of the cause for the original failure to pay royalties."

Given that the legislature did not provide a specific effective date for Act 743, by law, the default effective date was August 1, 2012. It is unclear whether the Act will apply retroactively. However, the Act does not expressly provide for retroactive application and because the changes are substantive and may affect vested rights, Act 743 should apply only to wells drilled after August 1, 2012.

Keywords: energy litigation, Act 743, risk fee, royalty, shift

— Laurie D. Clark, Baker Donelson Bearman Caldwell ∓ Berkowitz, PC, New Orleans, LA

August 20, 2012

The Constitutionality of Pennsylvania's Act 13

On July 26, 2012, major provisions of Pennsylvania’s recently enacted Act 13 were declared unconstitutional in Robinson Township., et al., v. Commonwealth, et al., Case No. 284 M.D. 2012. Act 13 repealed the previous Pennsylvania Oil and Gas Act, replacing it with a statutory framework intended to regulate oil and gas operations in Pennsylvania. Among other things, Act 13 provides for the assessment and distribution of impact fees, eminent-domain rights, enhanced environmental-protection provisions, and statewide uniformity in local ordinances that impact oil and natural-gas operations. The passage of Act 13 was criticized by many as disempowering local government and limiting private property rights.

Just over a month after its February 14, 2012, enactment, various townships, individuals, and an environmental association filed a petition for review seeking injunctive relief and challenging the constitutionality of Act 13 on 12 counts. Counts I–III alleged that section 3304 of Act 13 violated substantive due process under both the U.S. and Pennsylvania Constitutions. Count VIII alleged that Act 13 lacked sufficient guidance to the Pennsylvania Department of Environmental Protection (DEP) when delegating it authority to determine when a waiver from the setback requirements established by section 3215(b) could be granted.

Read the full case note.

Keywords: energy litigation, Act 13, Pennsylvania Oil and Gas Act, police power, zoning, setback requirements, non-delegation doctrine, Robinson Township v. Commonwealth

— Kara Stauffer Philbin, Fernelius Alvarez PLLC, Houston, TX

August 1, 2012

Colorado Sues City of Longmont to Challenge Drilling Ordinance

The Colorado Oil and Gas Conservation Commission sued the city of Longmont. In the lawsuit, the commission asserts that portions of the city’s local ordinance banning drilling are preempted by the Colorado Oil and Gas Conservation Act and implementing regulations.

In December 2011, Longmont enacted a moratorium on accepting applications for oil and gas well permits. Although set to expire in April, Longmont extended the moratorium through June. Members of the commission met with Longmont representatives to discuss preemption of the moratorium by state regulation, and how to address Longmont’s concerns through the existing regulatory program. Efforts to coordinate local and state regulation were unsuccessful.

In July, Longmont passed the ordinance at issue over the commission’s objection. The commission filed the lawsuit, asking the court to declare portions of the ordinance invalid because they are preempted by state regulation.

Colorado Oil and Gas Conservation Commission v. City of Longmont, in the District Court, Boulder County, Colorado.

Keywords: energy litigation, Colorado, ordinance, drilling ban, Longmont, preempt

— Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

August 1, 2012

Penn. Appellate Court Returns Fracking Control to Municipalities

A Pennsylvania appellate court struck down a portion of recently enacted Act 13 and returned power to municipalities to control drilling operations through zoning regulation.

Act 13 triggered widespread changes to the booming natural-gas industry in the Marcellus Shale in Pennsylvania. The act created a per-well annual fee, set forth what aspects of the industry were subject to municipal regulation, and changed scores of regulations. Under a short fuse, municipalities quickly updated local rules to comply with Act 13.

Act 13 allowed drilling in all zoning districts, even residential areas, within certain limits. The appellate court determined that the law cannot require municipalities to allow drilling in areas where local zoning regulations would prohibit drilling. The ongoing dissonance between state regulation and local ordinances creates a hotbed of regulatory uncertainty for operators.

Proponents of local zoning control argue that Act 13 unconstitutionally usurps power from local municipalities to protect the health and safety of their residents through zoning regulations that would prohibit drilling.

Proponents of Act 13 argue that the law is necessary to create a uniform and consistent set of rules to regulate the growing natural-gas industry, and that without it Pennsylvania risks losing the chance to promote and grow a key economic driver to its fullest potential.

Pennsylvania officials seek expedited review of the opinion by the Pennsylvania Supreme Court during the court’s October session in Pittsburgh.

Robinson Township, et al. v. Commonwealth of Pennsylvania, No. 284 M.D. 2012, in the Commonwealth Court of Pennsylvania, Opinion dated Jul 26, 2012.

Keywords: energy litigation, fracking, Pennsylvania, municipality, zoning, Act 312

— Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

July 30, 2012

Court of Appeals Overturns Royalty Judgment Against El Paso

The Thirteenth Court of Appeals of Texas overturned the trial court’s grant of summary judgment in favor of an alleged mineral owner against El Paso Corp. The court of appeals determined that neither side conclusively negated as a matter of law that the alleged mineral owner held superior title from a common source as to the disputed mineral acreage. Because questions remained unanswered by the fact finder, the court of appeals concluded that the trial court erred in its ruling.

The dispute between El Paso Corp. and the alleged mineral owner began in 2006 when the alleged mineral owner sued El Paso and claimed that he owned minerals contained in lands from which El Paso was producing oil and gas. The alleged mineral-interest owner sought an accounting from El Paso, and payment of oil and gas proceeds from December 2, 2002.

The parties filed competing motions for summary judgment. The alleged mineral-interest owner presented summary judgment evidence that purportedly established him as record-title holder of the minerals. El Paso presented summary judgment evidence that title examinations revealed that other parties held competing title.

The trial court granted summary judgment in favor of the alleged mineral-interest owner, ordered El Paso to pay past royalties, and terminated El Paso’s mineral lease on the property because El Paso had refused to pay royalties to the alleged mineral-interest owner.

The court of appeals determined that the competing summary-judgment evidence raised questions unanswered by the fact finder, and concluded that the trial court erred in its ruling.

The case is El Paso Production Oil & Gas USA LP n/k/a El Paso E&P Co. LP v. Sellers, No.13-10-00439-CV, in the Thirteenth Court of Appeals for the State of Texas.

Keywords: energy litigation, El Paso, royalty, Sellers, summary judgment

— Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

July 3, 2012

North Carolina Passes Fracking Legislation, Overrides Veto

The North Carolina legislature on July 2, 2012, overrode the governor’s veto to pass the state’s first fracking legislation. Senate Bill 820 was originally passed by the Republican legislature on June 21, but vetoed by Governor Beverly Perdue, a Democrat, on July 1. She said she supported fracking, but that the legislation contained insufficient environmental safeguards. Aided by an accidental vote in the House of Representatives, however, the Senate and House were able to muster the required three-fifths majorities to override her veto.

Senate Bill 820 creates the North Carolina Mining & Energy Commission of the Department of Environment & Natural Resources, and gives this commission the power to regulate fracking. It prohibits certain chemicals and constituents, including diesel fuel, in fracking fluids; requires the disclosure of all chemicals and constituents in fracking fluids, with an exception for trade secrets; requires the implementation of water and wastewater management plans; requires measures to mitigate impacts on infrastructure; requires safety devices and protocols; and requires notice, recordkeeping, and reporting. It also establishes a presumption that any water contamination within 5,000 feet of a wellhead is the responsibility of the well operator. This presumption can be rebutted by evidence that the contamination predated the drilling activity, based on a pre-drilling water test; that the operator was denied access to conduct a pre-drilling water test; or that the contamination was caused by something other than the drilling activity.

The new Mining & Energy Commission will consist of 15 members, including two members of a nongovernmental conservation interest, two representatives of the mining industry, two local elected officials, a representative of a publicly traded natural-gas company, a geologist, an engineer, and an attorney. Once the commission is formed, it will develop fracking regulations consistent with this legislation. The first drilling permits are not expected to be issued until 2014, at the earliest.

According to a recent U.S. Geological Survey, North Carolina contains 1.7 trillion cubic feet of natural gas in the Deep River Basin in Lee, Chatham, and Moore Counties in central North Carolina. USGS Releases Unconventional Gas Estimates for Five East Coast Basins, June 20, 2012. Based on 2010 consumption rates in North Carolina, that is a 5.6 year supply of natural gas.

Keywords: energy litigation, fracking, North Carolina

— Jack Edwards, Ajamie LLP, Houston, TX

July 3, 2012

Fracking Unlikely to Cause Earthquakes, Says NRC Study

Fracking is unlikely to cause earthquakes, according to a recent study by the National Research Council (NRC). Induced Seismicity Potential in Energy Technologies, National Research Council, June 15, 2012. The study was commissioned by the U.S. Department of Energy (DOE), after Sen. Jeff Bingaman (D-NM) requested in 2010 that the DOE use the NRC to study the potential for seismicity induced by energy development.

Hydraulic fracturing (fracking) involves the injection of fluids into underground shale formations to release trapped natural gas, and wastewater from fracking operations is sometimes disposed of using underground injection wells. Both types of injection have led to concerns that fracking can cause earthquakes.

The NRC study found that fracking “as presently implemented . . . does not pose a high risk for inducing felt seismic events.” Out of the approximately 35,000 fracking wells that exist in the United States, only one case of “felt seismicity” (in Oklahoma in 2011) has been reported where fracking is suspected, but not confirmed, as the cause of the seismicity. And globally only one case of “felt induced seismicity” (in Blackpool, England, in 2011) has been confirmed as caused by fracking. The study noted that these low numbers were likely due to “the short duration of injection of fluids and the limited fluid volumes used in a small spatial area.”

In contrast, the study found that the disposal of wastewater into underground injection wells “does pose some risk for induced seismicity, but very few events have been documented over the past several decades relative to the large number of disposal wells in operation.” This may be because most “disposal wells typically involve injection at relatively low pressures into large porous aquifers that have high natural permeability, and are specifically targeted to accommodate large volumes of fluid.” Factors that determine the probability of a seismic event include the volume of fluid injected, the injection rate, the injection pressure, and the proximity to existing faults and fractures. Where seismicity is detected, “[r]educing injection volumes, rates, and pressures have been successful in decreasing rates of seismicity associated with waste water injection.” The study cautioned that the “long-term effects of a significant increase in the number of waste water disposal wells for induced seismicity are unknown,” and that “[f]urther research is required.”

Keywords: energy litigation, fracking, earthquakes, National Research Council, Department of Energy

— Jack Edwards, Ajamie LLP, Houston, TX

July 2, 2012

Fracking Activities Could Pose Heightened Risks to Employers

In recent years, the fracking boom in the United States has led to hundreds of thousands of new jobs in the energy industry. According to a recent report commissioned by America’s Natural Gas Alliance, fracking and other unconventional natural-gas production techniques may create as many as 1.5 million jobs in the United States by 2035.

But along with an increase in a company’s employee pool comes heightened responsibilities for employers in the fracking industry. Not the least of these obligations are those imposed by the Occupational Safety and Health Association (OSHA), the country’s primary federal agency charged with the enforcement of safety and health legislation.

Last month, OSHA, along with the National Institute for Occupational Safety and Health (NIOSH), issued a hazard alert about fracking worker safety, stating that employers must ensure that their workers are properly protected from overexposure to silica in fracking operations. The hazard alert was spurred by a letter from the AFL-CIO, the U.S.’s largest federation of unions, to OSHA, calling for action to protect workers from silica exposure during fracking. Citing a recent field study by NIOSH ascertaining that 79 percent of exposed silica samples exceeded the NIOSH Recommended Exposure Limits, the letter urged OSHA to make a new silica standard and to expand its field work in the fracking industry to include medical surveillance of workers.

The OSHA alert reminds employers that they are “responsible for providing safe and healthy working conditions for their workers,” and cautions that “Employers must determine which jobs expose workers to silica and take actions to control overexposures and protect workers.” According to OSHA, “a combination of engineering controls, work practice, protective equipment, and product substitution where feasible, along with worker training, is needed to protect workers who are exposed to silica during hydraulic fracturing operations.” The alert lists a number of specific practices that employers can implement in their efforts to achieve the goal of worker safety in fracking operations.

The alert is significant to employers, in that it could increase the potential for OSHA investigations of fracking operations, particularly in the event of a report of harm to an employee for silica exposure. The alert also increases the risk that an employee injury could result in a willful violation of the Occupational Safety and Health Act, which carries significant penalties of up to $70,000 per violation. Employers are well advised to take all appropriate safety precautions against potential silica exposure to their employees.

Keywords: energy litigation, fracking, OSHA, NIOSH, silica

— Kelley Edwards, Littler Mendelson P.C., Houston, Texas

June 28, 2012

Ohio Passes Fracking Legislation

Ohio recently passed fracking legislation that will go into effect in September 2012. Ohio is home to both the Marcellus and Utica shales and has experienced a natural-gas boom in recent years thanks to fracking. The legislation, which is contained in Senate Bill 315, seeks to modernize existing law by addressing the unique concerns of fracking.

To improve transparency, the legislation requires the disclosure of all chemicals used in fracking operations, with an exception for trade secrets. The disclosure must occur within 60 days after the completion of drilling operations, either on a well-completion report submitted to the Ohio Department of Natural Resources (DNR) or on the chemical-disclosure registry maintained by the groundwater protection council and the interstate oil and gas compact commission (i.e., fracfocus.org). Well owners, however, are not required to report chemicals that occur incidentally or in trace amounts, and may also withhold from disclosure information that is a trade secret.

A trade-secret designation may be challenged by a property owner, adjacent property owner, or any person or state agency with an interest that may be adversely affected by filing a civil action in the Court of Common Pleas of Franklin County. In such an action, the court shall conduct an in camera review to determine whether the claimed information is a trade secret. A trade secret is nevertheless still required to be disclosed to: (1) the DNR, if necessary to respond to a spill, release, or investigation; or (2) a medical professional, if necessary to assist in the diagnosis or treatment of an individual who is affected by an incident associated with fracking operations. In such a case, the DNR or medical professional must otherwise maintain the confidentiality of the trade secret.

The legislation also seeks to protect water quality and minimize the effects on local roads. Well operators are required to conduct pre-drilling testing of water wells within 1,500 feet of a proposed fracking operation, and disclose the results in the permit application. This applies to wells in both urban and rural areas. The permit application must identify the proposed source of groundwater and surface water that will be used, state whether the water will be withdrawn from either the Lake Erie watershed or the Ohio River watershed, provide an estimate of the volume of recycled water to be used, and provide an estimate of the rate and volume of water withdrawal. The permit application must also contain either a copy of an agreement for maintenance and safe use of the roads and highways that will be used for access to and egress from the well site entered into on reasonable terms with the applicable local government, or an affidavit stating that the operator attempted in good faith to enter into such a road-use-management agreement but that no agreement could be reached.

During the life of the well, the well owner must maintain liability insurance for fracking operations of at least $5 million for bodily injury and property damage, and a “reasonable” level of coverage for environmental damage.

Violators of these provisions may be fined as much as $20,000 per day.

Senate Bill 315, which was passed by the Ohio legislature in May 2012, was signed into law by Gov. Kasich on June 11, 2012, and is set to become effective 90 days later.

Keywords: energy litigation, fracking, regulation, Ohio

— Jack Edwards, Ajamie LLP, Houston, TX

June 28, 2012

Houston Appeals Court Overturns Oil and Gas Royalty Verdict

On May 31, 2012, the First Court of Appeals in Houston issued an opinion in an oil and gas royalty dispute that amounted to an almost total reversal of the trial court’s multi-million-dollar verdict. The underlying lawsuit concerned three oil and gas leases in Jefferson and Hardin Counties, Texas. Charles Hooks and his estate sued operator Samson Lone Star for breach of contract, fraud, fraudulent inducement, and several other causes of action related to the three leases. While the trial court sided with Hooks on nearly all of his causes of action, the appeals court concluded that most his actions were untimely and brought well past the statute of limitations. Moreover, on one of the claims, the court found that Hooks ratified Samson’s actions by accepting royalty checks from Samson, thus estopping him from claiming breach of contract. The court’s ruling reiterated the more stringent discovery rule followed by Texas courts in resolving royalty disputes.

Read the full case note.

Keywords: energy litigation, Samson, Hooks, Houston, royalty, limitations, unpooled

— Courtney Scobie, Ajamie LLP, Houston, TX

June 1, 2012

California Seeks to Enact New Rules Regulating Fracking

The debate on fracking is heating up in California. The state currently does not regulate fracking differently from other extraction techniques. If Governor Jerry Brown gets his way, however, that soon may change. Governor Brown has asked the state legislature to increase the budget and size of the state’s oil-and-gas agency—the Division of Oil, Gas and Geothermal Resources—which is a division of the California Department of Conservation. The legislature preliminarily granted this request on May 9, 2012. Governor Brown hopes that the division’s increased resources will help it draft new fracking-specific regulations by 2014.

The California Department of Conservation hopes to enact fracking-specific regulations even sooner. It is currently holding a series of public workshops on fracking, and it hopes to have a draft of any new regulations by fall 2012. While the Department of Conservation’s regulations are merely in their infancy, when completed, they are expected to be some of the toughest in the country. Many expect that the state will impose stringent well-integrity standards and require disclosure of all chemicals used in the fracking process. The Department of Conservation is also commissioning an independent study to look at the effects of fracking on drinking water. The results of that study are expected to influence the draft regulations.

Keywords: litigation, energy litigation, California, hydraulic fracturing, fracking

— Robert Carlton, Haynes and Boone, LLP, Houston, TX

May 25, 2012

Lone Pine Order Leads to Dismissal of Fracking Case

A case in Colorado state court against Antero Resources Corp., Calfrac Well Services, Ltd., and Frontier Drilling LLC has been dismissed after the plaintiffs failed to satisfy a Lone Pine order.

The case, filed by William and Beth Strudley in March 2011, alleges property damage and personal injuries arising out of the defendants’ use of hydraulic fracturing. According to the complaint, the defendants operated wells located within approximately one mile of the plaintiffs’ property. The plaintiffs alleged that the defendants’ operations caused their water and air supply to become contaminated with an array of chemicals, causing the plaintiffs to eventually abandon their home. The plaintiffs also aver that their exposure to fracking chemicals caused them to suffer health problems, such as nosebleeds and congestion, and also caused them to fear future illnesses. The plaintiffs asserted claims for negligence, negligence per se, nuisance, trespass, strict liability, and medical-monitoring trust funds.

During case-management proceedings, the judge issued a Lone Pine order instructing the plaintiffs to detail their alleged injuries and damages and show minimal evidence of causation. In response, the plaintiffs submitted their medical records, maps, photographs, analyses of water and air samples, and expert testimony. After reviewing the materials, the court held that the plaintiffs failed to establish the prima facie elements of their claims, and dismissed all of the plaintiffs’ claims with prejudice. Although the records submitted showed evidence that certain compounds existed in the air and water around the plaintiffs’ home, there was not sufficient data showing a causal connection between the plaintiffs’ alleged injuries and the defendants’ drilling activities.

According to counsel for Antero, the case provides an example for how Lone Pine orders can be used by defendants in fracking-related toxic-tort cases to streamline discovery and shift the burden to the plaintiff early in the case. Plaintiffs’ counsel plans to appeal the decision, calling the ruling an erroneous use of a Lone Pine order.

Keywords: litigation, energy litigation, Lone Pine, hydraulic fracturing, fracking, Colorado

— Megan Bibb, Haynes and Boone, LLP, Houston, TX

May 15, 2012

Sackett Ruling Will Probably Not Impact CERCLA Enforcement

On March 21, 2012, the U.S. Supreme Court issued a unanimous decision in Sackett v. EPA (No. 10-1062). Although Sackett holds that the recipient of a compliance order from the Environmental Protection Agency (EPA) pursuant to the Clean Water Act (CWA) may seek pre-enforcement judicial review to challenge the EPA’s authority, many wonder whether the decision will also affect the EPA’s authority under other similar statutes, namely, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The short answer is that Sackett probably will not have an immediate impact on compliance orders issued pursuant the CERCLA, but the case demonstrates the Supreme Court’s growing frustration toward the EPA’s tactics and keeps the door open for future constitutional challenges.

The EPA issues approximately 3,000 compliance orders each year pursuant to environmental laws like the CWA and CERCLA. Prior to Sackett, five courts of appeals had held that the CWA precluded pre-enforcement review of compliance orders, and that such preclusion did not violate due process. Going forward, however, entities or individuals who receive compliance orders pursuant to the CWA may challenge the EPA’s authority by invoking the Administrative Procedures Act (APA). Notably, in reaching its decision, the Court observed that nothing in the CWA precludes pre-enforcement judicial review. However, the Court’s opinion did not address the potential due-process issues raised by the litigants.

By basing its ruling on statutory interpretation rather than on constitutional grounds, the Supreme Court limited Sackett’s potential impact on other environmental statutes. Unlike the CWA, CERCLA does expressly preclude pre-enforcement judicial review. This glaring difference between the texts of the CWA and CERCLA will likely be enough to prevent Sackett’s application to pre-enforcement judicial challenges brought in response to CERCLA compliance orders.

Whether or not CERCLA’s express preclusion is constitutional will have to be a question for another day, and Sackett in no way forecloses on the possibility of future constitutional challenges. To date, CERCLA orders have withstood constitutional challenges in some circuits. For example, in 2010 the D.C. Circuit in General Electric v. Jackson focused its analysis on General Electric’soptions in the face of a section 106 order. General Electric could either comply with the EPA’s order and sue for reimbursement of costs, or refuse compliance and wait for the EPA to sue.

However, during Sackett oral arguments, Justice Alito expressed incredulity that a government agency could have such unchecked authority in the United States. This sentiment was reiterated in his concurring opinion, wherein he stated that it is “unthinkable” that private-property owners in our nation can be denied access to the courts while potential fines quickly exceed millions of dollars. It is possible that future litigants will be emboldened by Justice Alito’s language to bring constitutional challenges to CERCLA’s provisions, which may lead to a future Supreme Court decision that will finally settle the constitutionality of CERCLA’s ban on pre-enforcement judicial review.

Keywords: litigation, energy litigation, CERCLA, CWA, EPA

— Megan Bibb, Haynes and Boone, LLP, Houston, TX

May 10, 2012

Interior Department Proposes Fracking Regulations

The Department of the Interior’s Bureau of Land Management (BLM) on Friday issued proposed regulations for the hydraulic fracturing—also called fracking—of oil and natural gas on federal and Indian lands. The proposed regulations largely follow the recommendations of the influential report issued last year by the Department of Energy’s Shale Gas Production Subcommittee. See Government Studies May Determine the Future of Fracking Regulation, Nov. 21, 2011. In a press release, Secretary Salazar stated that “it is critical that the public have full confidence that the right safety and environmental protections are in place. The proposed rule will modernize our management of well stimulation activities—including hydraulic fracturing—to make sure that fracturing operations conducted on public and Indian lands follow common-sense industry best practices.” Interior Releases Draft Rule Requiring Public Disclosure of Chemicals Used in Hydraulic Fracturing on Public and Indian Lands, May 4, 2012.

The BLM’s proposed regulations would (1) require the public disclosure of all chemicals used in fracking fluids, with an exception for trade secrets; (2) strengthen regulations related to well-bore integrity; and (3) address issues related to flowback water. In a change from the BLM’s original position, the chemicals in fracking fluids would not need to be disclosed until after drilling begins. The disclosed information is expected to be posted on a public website, possibly the FracFocus.org website already used by several states. To protect trade secrets and confidential business information, an operator could apply for an exemption from public disclosure, but the operator would be required to identify specific information and explain why it should not be publicly disclosed. If the BLM disagrees, it would be required to give the operator 10-business-days’ notice before releasing the information to the public.

The proposed regulations also seek to ensure well-bore integrity and ensure the safe handling of the water used in fracking. Before fracking occurs, operators would be required to submit cement-bond logs, perform mechanical-integrity testing, and submit a geological report on the rock surrounding the well. They would also be required to disclose specific information about the water source to be used, the type of materials (proppants) to be injected into the fractures to keep them open, the range of anticipated pressures to be used, and the estimated total volume of fluid to be used; describe the proposed handling of recovered fluids, including the estimated volume of fluid to be recovered, the proposed methods of managing the recovered fluids, and the proposed disposal method; and ensure that the facilities needed to process or contain the flowback water are available on location. Finally, operators would be required to certify in writing that they have complied with all federal, tribal, state, and local laws, including permit and notice requirements, related to fracking.

After fracking occurs, operators would be required to certify that the well-bore integrity was maintained throughout the operation, and submit a report and explanation if the actual operations deviated from the approved plan. They would also be required to report the actual volume of fluid used, the actual pressures reached, the actual fluids handled, and the volume of fluid recovered during flowback. Recovered fluids would be required to be stored in tanks or lined pits.

The proposed regulations would apply to 700 million acres of federal land and 56 million acres of Indian land. The current regulations, which are more than 30 years old, were not written to address modern fracking. Once the proposed regulations are published in the Federal Register, which is expected to occur soon, a 60-day public-comment period will begin, during which the public, governments, industry, and other stakeholders are invited to provide input. The regulations are expected to be finalized by the end of 2012.

— Jack Edwards, Ajamie LLP, Houston, TX

May 10, 2012

Petroleum-Engineering Firm Could Be Liable for Reserve Estimates

In its 2012 decision in Highland Capital Management v. Ryder Scott Co. and Chesapeake Energy Corp., the Court of Appeals for the First District of Houston reversed a summary judgment for the defendants and held that a petroleum-engineering firm could be liable under the Texas Securities Act (TSA) for providing estimates of oil-and-gas reserves to be included in an oil and gas exploration company’s Securities Exchange Commission (SEC) filings. Under this holding, the providing of “false” estimates of the oil and gas reserves or estimates prepared “with reckless disregard for the truth” could result in liability for aiding both the sellers as well as the issuers of interests in securities. Furthermore, the court held that the engineering firm’s alleged failure to follow SEC guidelines for estimating oil and gas reserves could satisfy the intent required to be an aider and abettor under the TSA.

Read the full case note.

— Donald D. Jackson and Mini Kapoor, Haynes and Boone, LLP, Houston, TX

December 15, 2011

New Chemical Disclosure Requirements Finalized

On December 13, 2011, the Texas Railroad Commission formally adopted its proposed regulations requiring disclosure of chemicals used in fracturing treatments, applicable to all wells for which the Commission issues an initial drilling permit on or after the regulations effective date, February 1, 2012. The regulations also require disclosure of other information about the fracturing treatment, including the date of treatment, volume of water and base fluid used, and other well-identifying information.

Enacted pursuant to HB 3328, these regulations will require submission of applicable fracking materials to the Commission through an online chemical disclosure registry FracFocus on or before the date a well operator submits its well completion report. The operator must identify the source of each additive used in the fracturing fluid, each chemical ingredient provided by the operator that is subject to federal disclosure requirements, and all ingredients intentionally added by the operator. Additionally, the operator must disclose to the Commission, either on FracFocus or in a separate document, the Chemical Abstracts Service (CAS) number for each chemical intentionally included in the fracturing treatment. The operator does not have to disclose chemicals not intentionally added, naturally occurring, or contained in an additive and undisclosed by the manufacturer, supplier, or service company.

The regulation also contains an exemption for disclosure of chemicals whose identity is a trade secret. An operator claims this exemption by reporting to the Commission the chemical family of the ingredient, stating that the identity and/or concentration of the ingredient are entitled to trade-secret protection, and disclosing the properties and effects of the unidentified chemical or chemicals. A landowner or adjacent landowner of the property where the wellhead is located may challenge this designation, as may the government, within 24 months of the operator’s well completion record.

Keywords: Texas, disclosure, fracking, public comment, regulation, Texas Railroad Commission

— Ben Allen and Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

November 16, 2011

Pennsylvania Court Leaves Door Open to a New Definition of "Minerals" in Marcellus Shale

In September, the Superior Court of Pennsylvania issued a Jekyll-and-Hyde opinion that highlights both a potential legal landmine and the possibility for an industry-friendly body of law in Pennsylvania for Marcellus shale natural gas producers. Specifically, the decision will impact producers who are operating on land where the surface and mineral estates were severed prior to the discovery of recoverable Marcellus shale gas. In Butler v. Powers, the court acknowledged that use of the term “minerals” in mineral deeds does not normally include hydrocarbons, including Marcellus shale natural gas, unless intended otherwise. The court cited two prior Pennsylvania Supreme Court cases, Dunham v. Kirkpatrick, 101 Pa. 36 (1882) and Highland v. Commonwealth, 161 A.2d 390 (1960), which state that when a deed grants or reserves minerals without specific mention of natural gas or petroleum, a rebuttable presumption arises that such deed intended to exclude such substances. The trial court in Butler relied on the same Pennsylvania cases in dismissing the appellants’ suit seeking a declaratory judgment that a deed reserving minerals and petroleum oils included Marcellus shale natural gas. In short, absent clear and convincing evidence to the contrary, if the operative grant or reservation of the mineral estate does not specifically mention natural gas, the producers may be drilling for gas that belongs to someone else.

 

Fortunately for Marcellus shale producers in Pennsylvania, the Butler court left open the possibility that Marcellus shale gas may not be subject to the Dunham and Kirkpatrick rules due to its unique properties. First, unlike natural gas produced out of traditional vertical wells, which is “ferae naturae” and flows freely in subterranean pore space, Marcellus shale natural gas is trapped within the shale formation and requires hydraulic fracturing (fracking) for extraction and production.

 

Second, the court recognized that this distinction in flow and extraction may be legally significant due to similarities to the extraction of coalbed gas. In U.S. Steel v. Hoge, the Pennsylvania Supreme Court held that gas present within coal seams belongs to the owner of such coal. Furthermore, the extraction of coalbed gas is similar to that of shale gas, because coal seams must be fracked to produce the gas trapped within the coal. If this analysis is applied to Marcellus shale gas, the owner of the shale itself will also own the natural gas trapped therein.

 

Unfortunately, even if Pennsylvania applies the Hoge rule to Marcellus shale natural gas, there is still significant risk to producers, because it is not clear whether the term “mineral” includes Marcellus shale. If not, exploration and production companies may have spent billions of dollars to produce natural gas that belongs to the owner of the surface estate.

Keywords: Marcellus, shale, natural gas, fracking, Superior Court of Pennsylvania

— Austin Frost, Haynes and Boone, LLP, Houston, TX

November 14, 2011

State Department Probe May Delay Obama Administration's Keystone XL Decision

The State Department has launched an investigation into the ongoing Keystone XL pipeline permitting process. TransCanada’s proposed pipeline would transport oil extracted from Canadian tar sands in Alberta, Canada, to American Gulf Coast refineries. Specifically, the State Department inspector general will address allegations that the department allowed TransCanada to pick Cardno Entrix, which recently has had extensive business dealings with TransCanada, to perform the project’s environmental assessment. Critics say the State Department should have forced TransCanada to pick a more neutral company to perform the assessment. Additionally, the inspector general will address allegations that a State Department employee improperly supported TransCanada’s top lobbyist. Finally, the investigation will consider allegations that TransCanada hired Paul Elliott, who was a campaign advisor to Secretary of State Clinton during her bid for the presidency, to lobby for the project, thereby creating a conflict of interest.

Originally, the Obama administration was to decide if the pipeline could go forward by the end of this year; however, the investigation will likely delay that decision. Depending on the investigation’s findings, the State Department could initiate a new environmental impact study or a new study of the pipeline’s route. Such studies could delay the ultimate permitting decision by up to two years. President Obama, responding to numerous complaints from environmental groups and lawmakers from districts along the pipeline route, now says that he himself will make the ultimate decision on whether to grant the project a permit. He has not given a timetable for his decision.

Keywords: Keystone XL, Obama administration, TransCanada

—Robert Carlton, Haynes and Boone, LLP, Houston, TX

November 3, 2011

Interior Department to Release New Regulations for Hydraulic Fracturing

Over the coming months, the Department of the Interior will release new regulations pertaining to hydraulic fracturing on federal lands, affecting natural gas production on 700 million acres of public land. On October 31, Deputy Interior Secretary David Hayes, speaking before the Energy Department Advisory Board’s Shale Gas Subcommittee meeting, indicated the new regulations will focus on three areas. First, mirroring many state requirements, the regulations will require operators to disclose the chemicals they use during the fracturing process. To assuage industry fears, however, the regulations will contain provisions to protect trade secrets. Second, the regulations will extend well bore integrity standards to the hydraulic fracturing stage of well development. Finally, the regulations will increase oversight of water used and produced at the well site. Specifically, Hayes indicated the new regulations may change water management requirements to include flowback fluid during hydraulic fracturing, in addition to water produced during the development process. This would mean that companies would need to detail their plans for disposing of and recycling flowback water. Hayes also noted that the drafters are working to ensure that the measures do not duplicate state regulatory efforts. With this aim in mind, one of the ideas the drafters are considering is a certificate program, whereby operators must certify that they are in compliance with local and state standards pertaining to water management.

According to Hayes, the new regulations will be influenced by the recommendations of the Department of Energy’s Shale Gas Subcommittee. The subcommittee released a 90 day report on August 18, 2011, in which it detailed potential avenues for improving the safety and reducing the environmental impact of shale gas production. Among the recommendations contained in the report, the subcommittee focused on making shale gas production operations, including fracturing formulas, more accessible to the public. It focused on potential measures to reduce the environmental and safety risks of shale gas operations. The subcommittee also proposed the creation of a Shale Gas Industry Operation Organization to come up with and continually improve a best operating practices regime. Finally, it focused on potential research and development opportunities to improve safety and environmental performance. These recommendations will be further solidified in the subcommittee’s 180 day report, set to be released on November 18; however, these themes, as they stand, will pervade the Department of Intereior’s new regulations.

Keywords: fracturing, regulations, federal, interior, public lands, Hayes

—Liz Klingensmith and Robert Carlton, Haynes and Boone, LLP, Houston, TX

October 25, 2011

Texas Fracturing Regulations—New Chemical Disclosure Requirements

On September 9, 2011, the Texas Railroad Commission proposed regulations requiring disclosure of chemicals used in fracturing treatments. The regulations also require disclosure of other information about the fracturing treatment, including the date of treatment, volume of water and base fluid used, and other well-identifying information. They will apply to wells for which the Commission issued an initial drilling permit on or after the regulations’ effective date.

These regulations, proposed pursuant to enacted HB 3328, require submission of a Chemical Disclosure Registry to the Commission on or before the date a well operator submits its well completion report. This registry must identify the source of each additive used in the fracturing fluid, each chemical ingredient provided by the operator that is subject to federal disclosure requirements, and all ingredients intentionally added by the operator. Additionally, the operator must disclose to the Commission, either in the registry or in a separate document, the Chemical Abstracts Service (CAS) number for each chemical intentionally included in the fracturing treatment. The operator does not have to disclose chemicals not intentionally added, naturally occurring, or contained in an additive and undisclosed by the manufacturer, supplier, or service company.

The regulation contains an exemption for disclosure of chemicals where the identity is a trade secret. An operator claims this exemption by reporting to the Commission the chemical family of the ingredient, stating that the identity and/or concentration of the ingredient are entitled to trade-secret protection and disclosure of the properties and effects of the unidentified chemical or chemicals. A landowner or adjacent landowner of the property where the well-head is located may challenge this designation, as may the government, within 24 months of the operator’s well completion record.

The public comment period for the regulations closed October 11, 2011, and these regulations will probably take effect by early 2012.

Keywords: Texas, disclosure, fracking, public comment, regulation, Texas Railroad Commission

—Ben Allen and Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

October 5, 2011

TRAIN May Stay New EPA Regulation of Power Plant Emissions

On September 22, 2011, the U.S. House of Representatives passed by vote of 249–169 H.R. 2401, Transparency in Regulatory Analysis of Impacts on the Nation (TRAIN). TRAIN proposes to delay, pending further committee review, the implementation of select recently proposed EPA regulations aimed at reducing airborne emissions. Specifically, TRAIN focuses upon new EPA rules directed toward regulating both emissions from individual power plants and aggregate emissions from power plants in certain states that are found to harm a neighboring state’s air quality.

TRAIN would stay the effective date of these new EPA regulations until a committee composed of a broad section of U.S. departments, including the secretary of agriculture, secretary of commerce, secretary of energy, chairman of the Federal Energy Regulatory Commission (FERC), and others is able to analyze the impact of the new EPA regulations upon industry and consumers. Such analysis would include “(1) estimates of the impacts of the such rules and actions on the global economic competitiveness of the United States, electricity prices, fuel prices, employment, and the reliability and adequacy of bulk power supply in the United States; and (2) a discussion and an assessment of the cumulative impact on consumers, small businesses, regional economies, state, local, and tribal governments, local and industry-specific labor markets, and agriculture.” TRAIN Summary as of 6/24/2011. The committee lacks authority to reject or accept the proposed regulations; any findings by the committee would merely carry persuasive authority.

Proponents of TRAIN argue these new EPA regulations have not been studied with any eye towards their economic impact on consumers and the power industry. Opponents, however, view the bill as a tactic to stall, perhaps indefinitely, the implementation of much needed air quality regulations. Casting doubt upon TRAIN’s future, the White House has already reported that “presidential advisors would recommend that [President Obama] veto the bill.”

At a minimum, with respect to the EPA’s newly proposed regulations, uncertainty abounds regarding precisely what light will appear at the end of the tunnel.

Keywords: EPA, regulation, emission, TRAIN, power plants

—Austin Elam, Haynes and Boone, LLP, Houston, TX

September 14, 2011

Feds Charge Pelican with Clean Air Act Violations

Federal prosecutors charged Pelican Refining Co., LLC (PRC) with two counts of Clean Air Act (CAA) violations and one count of obstruction of justice. PRC, headquartered in Houston, owns a 30,000 BPD refinery located in Lake Charles, Louisiana, where the charges were filed on September 6, 2011. The charges follow this July’s guilty plea of the company’s former vice president and general manager to two counts of related CAA violations. According to the plea agreement’s factual summation, many of PRC’s environmental compliance problems were attributable in part to “insufficient income from the facility’s operation.” The refinery had no environmental budget, environmental department, or  environmental manager. Operators allegedly relit the refinery’s intermittently-working flare with a flare gun purchased at Wal-Mart.

The Bill of Information alleges that PRC loaded crude oil into a tank with a failed floating roof, which allowed benzene and related aromatic compounds to escape into the atmosphere in violation of PRC’s Title V permit. These aromatic compounds are classified as toxic air pollutants and are known, probable, or suspected carcinogens. The charges also allege that PRC operated the refinery without a vapor recovery system at its barge loading dock, without a proper hydrogen sulfide scrubbing system, and without a properly functioning flare, all in violation of its permit. As to the obstruction of justice count, prosecutors accuse PRC of knowingly making false entries and false statements in CAA-related documents filed with the Louisiana Department of Environmental Quality.

Keywords: Clean Air Act, Pelican, compliance, benzene

—Pierre Grosdidier, Haynes and Boone, LLP, Houston, TX

September 12, 2011

Texas: Shell Settles Air Emission Reporting Dispute with Harris County

Harris County attorney Vince Ryan announced on Tuesday that Shell Chemical, L.P., has agreed to pay $500,000 to Harris County to settle a dispute arising from allegations that it failed to notify the county of petrochemical emissions. Shell’s Deer Park refinery, located in Harris County, emitted reportable amounts of petrochemicals between April 2008 and March 2010, but only notified state authorities of the emissions.

The Texas Commission on Environmental Quality promulgates emissions reporting requirements for businesses, which are compiled by the Secretary of State in the Texas Administrative Code and available on the Texas Register's website. Although Shell initially argued that these regulations only required Shell to notify the statewide commission when it released reportable amounts of emissions, part of Shell’s settlement includes an acknowledgement that it is also required to notify the county of reportable emissions events.  

An environmental attorney for Harris County indicated that the county also plans to pursue other companies that fail to notify the county of reportable emissions events. 

—Ben Allen, Haynes and Boone, LLP, Houston, TX

June 24, 2011

Texas Signs Fracking Disclosure Bill Into Law

On June 17, 2011, Texas Governor Rick Perry signed the Disclosure of Composition of Hydraulic Fracturing Fluids Act  H.B. 3328 into law. This legislation is the first in the nation to require public disclosure of the chemical composition of fracking fluids. The law requires disclosure of the type and rate of concentration of base fluids, additives, and chemical constituents used in fracking. Companies subject to the disclosure requirements can protect proprietary chemical formulas by seeking formal approval from the Texas Railroad Commission. Upon approval, such formulas will be protected from disclosure unless disclosure becomes necessary for medical treatment. Disclosed information will be posted on fracfocus.org, a public website. The law takes effect on September 1, 2011.

Keywords: fracking, disclosure, fracfocus, frac act

—Liz Klingensmith and Caroline Musa, Haynes and Boone, LLP, Houston, TX

May 5, 2011

BP Files Claim Against Cameron International in Deepwater Horizon Litigation

Multi-district litigation over the Deepwater Horizon blowout remains pending against BP Plc before United Stated District Judge Cal Barbier in the United States District Court for the Eastern District of Louisiana. BP blames the spill on the failure of a Cameron International Corp. manufactured blowout preventer. On April 20, 2010, the deadline for parties to file claims against one another, BP initiated a cross-claim against Cameron. That claim seeks contribution for the damages that the federal government might levy against BP. According to BP, the blowout preventer failed to meet design and manufacturing specifications. BP also alleges that Cameron acted negligently in the maintenance and repair of the equipment. Cameron has already filed cross-claims against numerous of the defendants in the case.

In March 2011, NASA contractor Det Norske Veritas issued a report as part of the federal investigation into the Deepwater Horizon incident, finding that the blowout was the result of a design flaw and not any misuse or mismanagement.

The blowout preventer did not work during the April 20, 2010, Deepwater Horizon blowout and is blamed for the three-month oil spill, the largest marine spill in the history of the petroleum industry. The federal panel investigating the cause of the rig explosion and spill, the U.S. Coast Guard-Bureau of Ocean Energy Management Regulation and Enforcement, is expected to file its final report on the incident in July 2011.

—Corey F. Wehmeyer, Cox Smith Matthews Incorporated, San Antonio

April 5, 2011

House Bill Could Make Impairment of Mineral Estates a Compensable Regulatory Taking

Texas Representative James L. Keffer has introduced new legislation that would require cities to compensate mineral owners when city regulations diminish the value of mineral estates. House Bill 3105, called “Regulatory Takings/Oil and Gas,” would make a city regulation that “damages, destroys, impairs, or prohibits development of a mineral interest” equivalent to a regulatory taking and subject to the Private Real Property Rights Preservation Act. Once subject to the Act, this would:

The House Energy Committee is holding a hearing to consider HB3105 on Wednesday, April 6.

Keywords: regulatory takings, legislation, mineral estate, mineral interest, city regulation

—Megan Bibb and Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

March 18, 2011

Senate Bill Seeks Required Disclosure of Chemicals in Fracking Fluid

Democratic Pennsylvania Senator Robert Casey reintroduced the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act in Senate Bill S. 587 on March 15, 2011. The proposed legislation would repeal hydraulic fracturing's exemption under the federal Safe Drinking Water Act (SDWA). Under the Bush Administration, the Energy Policy Act of 2005 amended SDWA to preclude the EPA from regulating hydraulic fracturing. If enacted, SDWA's definition of "underground injection" would be made to include fluids used in the hydraulic fracturing process. Additionally, the law would require disclosure of the chemical additives in fracking fluid. Proprietary chemical formulas would not be subject to disclosure unless use of the formula is necessary for medical treatment. Disclosure of the chemical additives would be made publicly available online and to regulatory agencies. Companion legislation (H.R. 1084) was also introduced in the House of Representatives.

Keywords: S. 587, FRAC Act, fracking, Casey, disclosure

—Liz Klingensmith, Haynes and Boone, LLP, Houston, TX

March 18, 2011

Fifth Circuit Nixes Court-Ordered Deadline to Act on Drilling Permits

On March 15, the Fifth Circuit temporarily stayed a court-imposed deadline that would have required federal off-shore regulators to act on certain drilling permits in the Gulf of Mexico. The Fifth Circuit’s order came just four days before the March 19 deadline imposed by Judge Martin Feldman of the U.S. District Court for the Eastern District of Louisiana.

The Fifth Circuit’s order does not explain its reasons for staying the deadline. In requesting the stay, the administration argued that the permits at issue had yet to meet permitting requirements and that mandating immediate action would disrupt the efficient review of permit applications. Furthermore, forcing the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), the agency tasked with processing off-shore drilling permits, to take action on the handful of drilling permits at issue in the case would come at the expense of other permits that were closer to approval.

The permits at issue had been pending for four to nine months. Prior to the Deepwater Horizon oil spill, such permits were processed in approximately two weeks. In his February 17 order requiring action on the drilling permits, Judge Feldman found that, while some delays might be justified, “[d]elays of four months and more in the permitting process . . . are unreasonable, unacceptable, and unjustified by the evidence before the Court.” Judge Feldman also noted that, although there was currently no drilling moratorium in effect, “it appears that the government has considered no applications for any activities falling within the scope of the moratorium.” On February 28, BOEMRE issued its first deepwater drilling permit since the Deepwater Horizon oil spill.

Judge Feldman previously drew attention when, three months after the explosions on the Deepwater Horizon, he temporarily enjoined the Interior Department from enforcing a six-month drilling moratorium.

Keywords: moratorium, drilling permits, off shore, BOEMRE, Deepwater Horizon, drilling

—Wolf McGavran, Haynes and Boone, LLP, Houston, TX

March 18, 2011

Devon, Dallas Energy Billionaire Liable for Fraud Verdict

A Houston jury found Dallas energy billionaire Trevor Rees-Jones and Oklahoma City-based Devon Energy Corporation liable for fraud arising from the 2006 sale of Chief Holdings, LLC, a Barnett Shale oil and gas developer. D. Bobbit Noel Jr., former minority partner in Chief Holdings, alleged that Rees-Jones committed fraud and breached his fiduciary duties when he bought out Noel’s share of Chief Holdings for $6.5 million in 2004. After purchasing Noel’s 5.76 percent share, Rees-Jones sold Chief Holdings to Devon in 2006 for over $2 billion.

The jury found Rees-Jones received $369,042,890 in profits from selling Chief Holdings and awarded Noel over $116 million in damages, the amount Noel’s minority share currently would be worth. Craig Haynes, attorney for Rees-Jones, maintains that Noel signed a release of all claims against Rees-Jones and said much of the jury’s damage calculation was based on unrecoverable “consequential damages.” Haynes said the accurate damage amount is $8 million, which was the value of Noel’s share when Rees-Jones sold Chief Holdings to Devon. Rees-Jones and Devon plan to appeal the verdict.

Keywords: Rees-Jones, Devon, Bobbit, Chief Holdings, verdict, fraud, billionaire

—Jason Huebinger, Haynes and Boone, LLP, Houston, TX

March 15, 2011

Proposed Legislation Would Repeal Tax Break for Costly Natural Gas Production

Texas Democrat Representative Lon Burnam from Fort Worth introduced revenue-raising legislation, which includes a repeal of the tax break for high-cost natural gas production. If passed, the legislation would raise an estimated $2.8 billion. Representative Burnam contends that such legislation is necessary to alleviate the impact of major state budget cuts, which are required as a result of the multibillion-dollar deficit.

At this point, it appears unlikely that the legislation would pass because Republicans outnumber Democrats 101 to 49. Republican leaders—including Governor Rick Perry—have already ruled out new or increased taxes as a response to the deficit; however, Representative Burnam insists that legislators from both sides of the aisle are examining the possibility of raising taxes due to the severity of the proposed services cuts.

Despite the deficit, critics of the legislation maintain that eliminating the tax incentive would do more harm than good because it would ultimately weaken one of the strongest industries in Texas’ economy. According to James LeBas, a fiscal consultant for the Texas Oil and Gas Association, oil and gas development as been “one of the few growing segments” of the state’s economy, and “a lot of states are ready to take away our rigs and our jobs.” Industry officials posit that the 22-year-old exemption generates $4 of economic growth for every dollar invested and creates about 40,000 jobs each year. The exemption is also credited with incentivizing the development and use of costly gas extraction techniques, which have resulted in the production of hard-to-reach natural gas. Although Representative Burnam recognizes the successfulness of the exemption in promoting natural gas production, he argues that it is no longer necessary.

Keywords: tax-break, legislation, Fort Worth, natural gas, Burnam, Perry

—Megan Bibb, Haynes and Boone, LLP, Houston

March 15, 2011

BP Seeks Additional Testing on Failed Blowout Preventer

Multi-district litigation remains pending against BP PLC before District Judge Cal Barbier in the U.S. District Court for the Eastern District of Louisiana. On March 8, 2011, BP filed papers in the case, seeking access to the failed blowout preventer for additional testing. The blowout preventer did not work during the April 20, 2010, Deepwater Horizon blowout and is blamed for the three-month oil spill, the largest marine spill in the history of the petroleum industry. A joint investigation team has been supervising the testing of the blowout preventer, which began at a New Orleans NASA facility in November. Testing was halted on March 4, 2011. The initial testing, aimed at determining the cause of the blowout preventer failure, was performed by NASA contractor Det Norske Veritas. Veritas is expected to submit findings by March 20. The joint investigation team believes Veritas performed the necessary tests and that official testing is complete. However, the team invited BP to ask the court to allow its own testing.

BP’s filing seeks an order permitting access to the blowout preventer to perform additional testing that is says Veritas refused to do. BP also seeks court assistance in ordering the cooperation of Cameron, the company that manufactured the blowout preventer, and Transocean, the company responsible for maintaining it.

The federal panel investigating the cause of the rig explosion and spill, the U.S. Coast Guard-Bureau of Ocean Energy Management Regulation and Enforcement, is expected to make a preliminary statement by mid-April and file its final report on the incident in July 2011.

Keywords: BP, blowout preventer, testing, Veritas, DNV

—Corey F. Wehmeyer, Cox Smith Matthews Incorporated, San Antonio

March 1, 2011

Ensco Offshore Co., et al. v. Salazar: Court Grants Preliminary Injunction

In Ensco Offshore Co., et al. v. Salazar, Ensco, a provider of offshore oil drilling services, sued the federal government, seeking a preliminary injunction regarding five specific drilling permits in which Ensco holds a contractual stake. The lawsuit was filed in the Eastern District of Louisiana and assigned to United States District Judge Martin L. C. Feldman. Ensco’s motion for preliminary injunction asked the court to require the government to act on Ensco’s five permit applications, which had been pending for four to nine months.

On January 13, 2011, the court denied without prejudice Ensco’s motion for preliminary injunction and ordered supplemental briefing. On February 17, 2011, the court issued an order granting Ensco’s motion for preliminary injunction. In its order, the court ordered the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), which is a division of the U.S. Department of the Interior, to act on Ensco’s five pending applications within 30 days of the order and to simultaneously report to the court its compliance.

After the Deepwater Horizon explosion and catastrophic oil spill that followed, the Secretary of the Interior twice imposed a blanket moratorium on deepwater drilling in the Gulf of Mexico. For the five months during which the bans were in place, no permits were issued for deepwater drilling. Even after the secretary formally lifted the second moratorium on October 12, 2010, permits for deepwater drilling activities were not processed. The order in Ensco provides a blueprint for other energy companies to seek court relief from indefinite government delay on drilling permits.

Keywords: BOEMRE, Ensco, offshore, Feldman, injunction, moratorium

—Andrew L. Edelman, Kristen W. Kelly, and Darin L. Brooks, Beirne, Maynard, & Parsons, LLP, Houston, Texas

December 20, 2010

Court Upholds Dismissal of Fraud Claim for Manipulation of Natural Gas Prices

In Rio Grande, the plaintiffs alleged that the defendants—including energy traders and operators of pipelines and other infrastructure—monopolized natural gas trading through the use of a price index for deliveries to the Houston Ship Channel. The index at issue is published monthly in publications such as Platts Inside FERC’s Gas Market Report. Specifically, the plaintiffs alleged that the defendants exploited their market position by making “bidweek” (usually the last five days of a preceding month) sales at artificially low prices, which resulted in suppressing the index to the benefit of the defendants and the detriment of the plaintiffs and other sellers bound by index linked contracts. Plaintiffs’ original complaint asserted claims under the Sherman Act for predatory pricing, unlawful monopolization, and restraint of trade. The district court found that the plaintiffs failed to allege any predatory behavior and facts showing the extent of defendants’ market power and failed to do more than simply assert collusive behavior. The court dismissed the plaintiffs’ claims pursuant to Rule 12(b)(6) and granted plaintiffs 30 days to amend.

Plaintiffs’ amended complaint aimed to cure its Sherman Act monopolization claim and asserted an additional claim of common law fraud. This time, the plaintiffs alleged that the defendants “knowingly, intentionally and recklessly misrepresented and omitted facts by reporting trade data . . . to Platts that: (i) intentionally misstated the true market value of gas sold at the Houston Ship Channel; and (ii) failed to disclose that the gas prices that they reported did not represent, and were not intended to represent, the true market forces of supply and demand.” Plaintiffs did not allege that the defendants misreported their sales but that the data they supplied was misleading because of market manipulation.

The district court denied plaintiffs’ motion to amend its complaint for futility, holding that the amended complaint still failed to state a claim under Rule 12(b)6. The court held that the truthful reporting of sales did not constitute a misrepresentation, and plaintiffs failed to plead facts illustrating the defendants’ intent to induce reliance by failing to disclose any market manipulation. Plaintiffs appealed, challenging the dismissal of the fraud claim only.

—Matthew A. Moeller, Plauche Maselli Parkerson, New Orleans, LA

December 6, 2010

New York Temporarily Bans Fracking

On November 29, 2010, the New York State Assembly voted 93 to 43 on bill number 11443-B to temporarily ban the issuance of new drilling permits for wells that utilize fracking in "low permeability natural gas reservoirs, such as the Marcellus and Utica shale formations." New York's temporary ban represents the first such legislative action against fracking of its kind, and it is anticipated that New York Governor David Paterson will sign the bill into law within the 10-day period required by New York law. Upon approval by the governor, the bill will take effect immediately. However, the bill automatically expires on May 15, 2011, providing some consolation to gas producers who are anxious about a changing regulatory environment. Additionally, the bill does not affect the renewal of drilling permits for existing wells that utilize fracking.

The ban comes in the midst of an ongoing two-year study of fracking by the Environmental Protection Agency (EPA) in which the EPA is attempting to assess fracking's potential impact on drinking water, human health, and the environment. As part of that study, the EPA recently completed a round of public hearings and received responses from eight fracking companies to voluntary requests for information. The temporary ban references ongoing investigations in New York as well, stating that the "purpose of such suspension shall be to afford the states and its residents the opportunity to continue the review and analysis of the effects of hydraulic fracturing on water and air quality, environmental safety, and public health."

Keywords: hydraulic fracturing, fracking, New York

—Michael Raab, Haynes and Boone, LLP, Houston, TX

November 12, 2010

A "Crude" Opinion for Plaintiffs' Lawyers in Ecuadorian Lawsuit Against Chevron

In a 54-page opinion issued on November 4, 2010, Judge Lewis Kaplan denied plaintiffs’ motion to quash Chevron Corporation’s subpoena directing plaintiffs’ attorney advisor, Steven Donziger, to produce documents and to testify.

Plaintiffs brought the underlying lawsuit in Ecuador seeking to recover $113 billion against Chevron for alleged environmental pollution. In response, Chevron sought discovery in the United States to show that it has been denied due process due to plaintiffs’ fraud and improper collusion with the Ecuadorian government—which also has financial and political interests in a successful plaintiffs’ outcome. The discovery sought focuses, in part, on Chevron’s attempt to show that the "global assessment" of a supposedly neutral independent damages expert and the evidence submitted in Ecuador have been fraudulent.

At the center of the controversy is Donziger, a New York attorney and Harvard Law School graduate who "has been extremely active in support of the [plaintiffs]." Donziger efforts include lobbying the Ecuadorian and United States governments, raising money to support litigation efforts, organizing a media campaign, and soliciting and interacting with celebrity supporters. Donziger’s role in the litigation was captured on film in Crude, a documentary of the Ecuadorian lawsuit against Chevron. The publicly released version of Crude focused in large part on Donziger’s words and activities and depicted plaintiffs’ in a negative light.

Crude’s release prompted Chevron to seek production of outtakes that did not appear in the documentary’s final cut. The court held in a prior opinion that Chevron was entitled to the footage sought in discovery. Now, more than 85 percent of the outtakes have been produced and show disturbing misconduct by Donziger and plaintiffs’ counsel.

Based primarily on his review of the outtakes from Crude, Judge Kaplan found that there is substantial evidence to support Chevron’s fraud claims, because (1) the court-appointed damages expert was chosen as a result of Plaintiffs’ ex parte contacts with the Ecuadorian courts; (2) plaintiffs’ consultants wrote at least part of the court-appointed expert’s damages report; and (3) the court-appointed expert presented “the global assessment” report as his independent work.

Judge Kaplan rejected Donziger’s claims that Chevron’s subpoena violated the attorney-client privilege and the work product doctrine because Donziger is not licensed to practice law in Ecuador and he acted primarily in capacities as lobbyist, public relations consultant, media representative, and political organizer—not as an attorney. Judge Kaplan ordered Donziger to comply with Chevron’s subpoena. However, his order left open the possibility that privilege claims could be asserted during the deposition in response to specific questions and for the production of certain documents. The court appointed a special master to preside at the deposition to deal with any claims of privilege and instructed Donziger to follow the federal and local rules to assert his privilege claims on a document-by-document basis. Based on the these instructions, the court said it would resolve whatever privilege claims Donziger asserted.  

Keywords: Chevron, Donziger, Crude, Ecuador

—Heidi Thomas Bundren, Haynes and Boone, LLP

October 21, 2010

No Violation of Clean Air Act with Compliance to State Implementation Plan

The U.S. Court of Appeals for the Seventh Circuit reversed a jury’s finding that Duke Energy’s predecessor, Cinergy Corp., violated the Clean Air Act by making modifications to a coal-fired energy plant in Indiana that increased annual pollution without a federal permit. Cinergy was purchased by Duke Energy in 2006. United States v. Cinergy Corp., 09-3344, 09-3350, 09-3351 (7th Cir. Oct. 12, 2010).

In the U.S. District Court for the Southern District of Indiana, Cinergy argued that the plant modifications did not require a permit because they did not increase the hourly rate of emissions for nitrogen oxide and sulfur dioxide, even if they increased the plant’s annual emissions of those pollutants. Cinergy asserted that when the plants were modified, this hourly emissions rate interpretation was included in Indiana’s state implementation plan (SIP) for the Clean Air Act, which the Environmental Protection Agency (EPA) approved. EPA acknowledged that it approved the plan but also noted that Indiana had agreed to update its definitions to conform to the annual-based emissions standard subsequently adopted by EPA. Based on its compliance with the SIP hourly emissions standard, Cinergy argued that it did not need a permit for the plant modifications.

U.S. District Judge Larry McKinney rejected this interpretation and held that without the required permit, Cinergy was liable for increased pollution caused by the modifications. The case went to a jury, which found that modifications undertaken between 1989 and 1992 were likely to increase the plant’s annual emissions of sulfur dioxide and nitrogen oxide, and, therefore, the company should have sought a permit for these modifications. The district court ordered Cinergy to retire certain coal-fired boiler generating units by September 2009.

However, a three-judge panel of the Seventh Circuit reversed the jury verdict and ruled that the modifications complied with Indiana’s SIP, which was approved by EPA in 1982, and that SIP was in effect when Cinergy began the modifications on the plants in 1989. Therefore, the plant did not need a permit for the modifications that increased the annual emissions of sulfur dioxide. The court stated that said the Agency "should have disapproved" Indiana’s SIP but chose to approve the SIP instead. Writing for the panel, Circuit Judge Richard Posner stated that "[t]he Clean Air Act does not authorize the imposition of sanctions for conduct that complies with a State Implementation Plan that the EPA has approved. . . . The blunder was unfortunate, but the agency must live with it." The court also reversed Cinergy’s liability for nitrogen oxide emissions because it was based on EPA expert witness testimony that should not have been admitted at trial.

Keywords: Clean Air Act, Cinergy, State Implementation Plan, SIP, EPA

—Linda Tsang, Beveridge & Diamond PC, Washington, D.C.

October 15, 2010

Stuxnet Malware Targets Energy Infrastucture SCADA Systems

A sophisticated computer worm has been discovered that was designed to specifically attack certain Supervisory Control and Data Acquisition (SCADA) systems called “Stuxnet.” SCADA systems are designed to coordinate industrial processes such power generation and infrastructure such as oil and gas pipelines and power and water distribution.

The Stuxnet worm has been reported as being configured to attack a very particular SCADA configuration, indicating it may have been created to target a specific facility or facilities. It was designed to infect the Programmable Logic Control (PLC) component and inject particular blocks of data that are used to manage critical processes that operate at high speeds or under high pressure. Given the complexity of the worm, experts have opined that it was likely created by a well-funded private group or government.

The worm was discovered on infected computers in Iran. Experts have speculated that it was designed to disable certain nuclear facilities in Iran. A study of the spread of Stuxnet by U.S. technology company Symantec shows that it has spread to several other countries, including the United States. The European Union’s cybersecurity agency, ENISA (European Network and Information Security Agency) has described Stuxnet as a “new class and dimension of malware” that represents a “paradigm shift.” The United States’ Department of Homeland Security has issued a handful of advisories about Stutnex since last July through ICS-CERT (Industrial Control System-Cyber Emergency Response Team), but some critics complain the United States’ response has been insufficient.

— Sean Farrell, Haynes and Boone LLP, San Antonio, Texas

October 15, 2010

FERC Issues Revised Statement on Penalty Guidelines

On September 17, 2010, the Federal Energy Regulatory Commission (FERC or Commission) issued a Revised Policy Statement on Penalty Guidelines to address comments FERC received in response to its previously-released Policy Statement on Penalty Guidelines. The modified Penalty Guidelines are attached to the Revised Policy Statement.

The Revised Statement on Penalty Guidelines (Revised Statement) bases penalties on factors consistent with FERC's policy statements on enforcement and assigns specific weightings to each factor. The Penalty Guidelines are still generally modeled on the United States Sentencing Guidelines, but there are differences between the new Revised Statement and the Sentencing Guidelines. A key difference is that the revised Penalty Guidelines do not restrict FERC's discretion to make individual assessments based on the facts specific to a given case or to close investigations or self-reports without sanctions.

The Revised Statement will apply to violations of Reliability Standards only in FERC Part 1b investigations and enforcement actions, and do not apply to reviews of the North American Electric Reliability Corporation's (NERC's) Notices of Penalty. The Revised Statement on Penalty Guidelines reduces the base violation level for reliability violations from 16 to 6 (FERC penalties are assigned a violation level that is adjusted based on various factors to determine the base penalty amount unless it is exceeded by the pecuniary gain to the offender or the pecuniary loss caused by the violation) and increases the risk of increased penalties based on the risk of and degree of potential harm for reliability violations.

The Revised Statement further clarifies that it will use the quantity of load lost (in MWh) as a result of a market participant's violation of a NERC Reliability Standard as one measure of the seriousness of the violation, but acknowledges that in some circumstances load shedding may be necessary to comply with the Reliability Standards, and would not result in a penalty. The Revised Statement modifies the Penalty Guidelines provision on "compliance credits," which reduces a base violation level in recognition of effective compliance programs such that it allows for partial compliance credit for effective but imperfect compliance programs and eliminates compliance credit when certain personnel participated in, condoned, or were willfully ignorant of a violation. The Revised Statement also allows for unbundling penalty mitigation credits for self-reports, cooperation, avoidance of trial-type hearings, and acceptance of responsibility.

— Sean Farrell, Haynes and Boone LLP, San Antonio, Texas

Algae Used to Scrub CO2 from Coal Plant

IRecently, European energy company Vattenfall installed a greenhouse next to a small coal plant in Senftenberg, Germany, with the hopes of cultivating algae that will consume the coal plant’s carbon dioxide (CO2) emissions. The project is still in its early stages, and it is unclear what impact other gases in coal plant emissions may have on the algae’s ability to grow. Vattenfall intends to continue the experiment until October 2011, and will publish its initial results.

Algae absorbs CO2 as part of its life cycle, and is also capable of absorbing SOx and NOx, two compounds that cause acid rain. The algae produced with CO2 can be used as an ingredient in animal feed, to produce industrial grease, or as a biofuel feedstock.

Vattenfall’s use of algae to clean coal plant emissions is not the first of its kind. Different groups have been trying to develop techniques for using algae to “sponge up” the CO2 in industrial exhaust. In 2006, the New York State Energy Research Authority and NRG Energy began testing of a system using algae to consume a power plant’s CO2 emissions. In 2007, two Australian firms, Linc Energy and Bio Clean Coal initiated a similar effort. In 2008, a project at the Massachusetts Institute of Technology found that diverting CO2 through water populated by algae reduced emissions by as much as 82 percent. In 2009, researchers at Indiana University announced they were studying the effects of algae on carbon dioxide from coal plants. Also in 2009, Arizona Public Service (the largest electricity provider in the state) secured $70.5 million in stimulus funds to expand their effort to create biofuel from algae grown using CO2 from a coal plant.

— Sean Farrell, Haynes and Boone LLP, San Antonio, Texas

Casing Failure in Four Wells Found to Be a Single Occurrence for Insurance Coverage Purposes

In 2006, Maverick Tube Corporation (Maverick) manufactured defective well casing, which was sold to Dominion Exploration and Production Co. (Dominion) through 11 separate sales. The well casing failed in four separate wells, forcing Dominion to plug and abandon the wells and drill replacement wells. After settling the matter with Dominion, Maverick filed a claim with its insurance carrier, Westchester Surplus Lines Insurance Company (Westchester). Westchester denied coverage and filed a declaratory judgment action seeking a ruling that Dominion's claims did not involve an "occurrence" under the relevant policies. The Fifth Circuit Court of Appeals reversed the lower court's decision and found that the casing failure did constitute an "occurrence" under Maverick's insurance policies. On remand, Westchester argued that the 11 separate sales of defective casing were separate occurrences each subject to Maverick's self-insured retention. Maverick contended that the failures constituted one occurrence, stemming from the defective manufacturing of the casing. On June 28, 2010, the United States District Court for the Southern District of Texas, with Justice Lee Rosenthal sitting, held that the four well failures constituted one occurrence under Maverick's insurance policies. Westchester Surplus L. Ins. Co. v. Maverick Tube Corp., No. H-07-540, 2010 WL 26335623 (S.D. Tex. 6-28-2010).

In July and August 2006, Maverick sold more than 1,300 pieces of a specific type of casing to its distributor to be shipped to Dominion for use and operation in multiple gas wells. There were 11 separate sales of this casing to Dominion. During a two-week period in September 2006, Dominion experienced failure in four separate gas wells, all containing the particular casing manufactured by Maverick. In November 2006, Dominion sent a demand to Maverick asserting that the casing failure fell within Maverick's published warranty policy. After an investigation, Maverick concluded that the failure was due to a manufacturing defect at Maverick's Columbia processing facility and settled with Dominion. Maverick then filed a claim with Westchester, seeking reimbursement of the settlement amount less its self-insured retention and original cost of the casing. Westchester denied Maverick's claim, concluding that Dominion appeared to have a valid breach of contract and warranty claim but no valid negligence claim that would be considered an occurrence under the policy.

— Matthew McGowen, Patton Boggs LLP, Dallas, Texas

Fifth Circuit Denies Appeal for Injunctive Relief for Constructing Compressor Stations

The United States Court of Appeal for the Fifth Circuit recently denied Texas Mid Stream Gas Services, LLC's (TMGS) appeal for injunctive relief regarding its plans to construct a natural gas pipeline and compression station in Grand Prairie, Texas. Texas Midstream Gas Services, LLC. v. City of Grand Prairie, et al., No. 08-1120, 2010 WL 2168643 (5th Cir. 6/01/10). TMGS announced its plans in 2007. Concerned by the possibility of a compressor station within the city limits, the Grand Prairie City Council amended Section 10 of the Unified Development Code on July 1, 2008, to cover natural gas compressor stations. Section 10 required that the station comply with setback rules, have an eight-foot security fence, enclose equipment and structures within a building, confirm to certain aesthetic standards, and have paved means of vehicular access.

TMGS filed suit against Grand Prairie and certain city officials for declaratory and injunctive relief regarding Section 10. TMGS argued that the requirement impinged on its state conferred eminent domain powers. However, the district court held that the setback requirement was lawful. TMGS filed an interlocutory appeal, challenging the district court's failure to enjoin the setback

Supreme Court Approves Massachusetts Wind Project

The Hoosac Wind Project in western Massachusetts has been tied up in lengthy litigation, an event not uncommon for wind projects in Massachusetts. But on July 6, 2010, the Massachusetts Supreme Judicial Court issued a ruling that would finally allow the project to begin. And newly passed legislation may provide a streamlined framework for approval of future wind projects in Massachusetts.

In 2003, New England Wind LLC proposed the Hoosac Wind project, a 20-turbine, 30-megawatt, project on a ridge in Berkshire County, Massachusetts. The anticipated cost of the project was approximately $100 million, and proponents of the project claimed that it would be able to power more than 10,000 homes. But the project was met with resistance by several citizen groups, who filed a lawsuit based on wetland regulation to block the project. Both the Superior Court and the Supreme Judicial Court upheld the Massachusetts Department of Environmental Protection's decision to allow the project, but the permitting and appeal process delayed the project for more than six years.

Lengthy litigation, which has affected approximately one-third of the proposed Massachusetts wind projects, is likely a major motivating factor behind the bills recently passed by the Massachusetts legislature. On July 14, 2010, the Massachusetts House of Representatives passed the Wind Energy Siting Reform Act. The bill allows creation of wind energy permitting boards to determine if wind projects should be authorized, removing the permitting power from the municipal bodies, such as planning and zoning boards, which currently have that power. The bill also eliminates some appeals that are allowed under current law. The Senate passed a similar bill earlier this year, and now the legislators must complete a compromised version. Supporters of this legislation claim that it will help the environment by making wind projects more feasible while opponents believe that it will consolidate too much power with the state and override local control and the people's traditional right of appeal.

— Matthew McGowen, Patton Boggs LLP, Dallas, Texas

Outer Continental Shelf Oil and Gas Development Plan

On March 31, 2010, President Obama announced that his administration would allow new offshore drilling on selected portions of the Outer Continental Shelf (OCS). Congressional and presidential moratoria prevented offshore oil and gas development on much of the OCS since 1981. In 2008, President Bush lifted the executive order banning offshore drilling, and Congress let its moratorium expire. President Obama announced that he will not reinstate a ban covering the Atlantic Coast south of New Jersey or the Chukchi and Beaufort Seas north of Alaska. The Obama administration stated that its strategy is to expand oil and gas production on the OCS while protecting fisheries, tourism, and places off our coast that are too special to drill.

The president's plan will ban oil and gas exploration off of the Atlantic Coast from New Jersey north and the Pacific Coast from the Mexican border to the Canadian border. Exploration on portions of the eastern Gulf of Mexico and Florida coast will also be banned as will exploration of Alaska's Bristol Bay. Despite the president's announcement that he will not reinstate the ban on offshore drilling in the Chukchi and Beaufort Seas, the president's plan cancels several lease sales that had been planned under the Bush administration. Further, many of the areas not banned under the president's plan will not be open for exploration and development until after the government conducts detailed studies regarding geology and the impact of drilling on the environment and military activities.

On April 1, 2010, in response to President Obama's announcement, Rep. Edward Markey (D-Mass.) announced that he plans to reintroduce legislation that will penalize companies that let leased oil drilling rights lay dormant. It has been reported that Rep. Markey's proposed legislation would place an escalating fee on drilling rigs not being used by companies to incentivize companies to drill the offshore areas they already have leased before acquiring new leases.

— Sean Farrell, San Antonio, Texas

FERC Order Signals Approval of Lower Penalties in Reliability Standards Violations

On November 13, 2009, the Federal Energy Regulatory Commission (FERC) issued its Order on Omnibus Notice of Penalty Filing (the Omnibus Order). The Omnibus Order addressed 564 penalties proposed by the North American Electric Reliability Corporation (NERC). NERC filed the 564 penalties with FERC in NERC's capacity as the Electric Reliability Organization certified by FERC in 2007 to create and enforce mandatory federal reliability standards pursuant to the 2005 Energy Policy Act.

The 564 penalties applied to 140 different entities nationwide, but 541 of the 564 penalties were proposed at zero dollars ($0). The remaining 23 proposed penalties totaled $91,000, and were assessed against eight entities registered with NERC.

The Omnibus Order noted that NERC had asserted that the violations were discovered before FERC set forth its expectation for the development of records in Notices of Penalty.[3] NERC had conceded that the available records did not meet FERC's later-imposed standards but that no significant reliability benefit would be gained by pursuing the development of a more complete record. NERC averred that the possible violations had all been addressed by mitigation plans and did not pose a substantial risk to the Bulk Power System. NERC asked FERC to close these older and relatively minor cases to allow it and the regional entities[4] to concentrate on more significant violations.

— Sean Farrell, San Antonio, Texas

DARPA Discovers Method to Derive Oil from Algae for $2 per Gallon

The Defense Advanced Research Projects Agency (DARPA), the U.S. governmental agency that created the Internet and stealth fighters, has successfully developed a method to extract oil from algal ponds at a cost of $2 per gallon. [See Dr. Richard Van Atta, “Fifty Years of Innovation and Discovery” and Suzanne Goldenberg, “Algae to Solve the Pentagon’s Jet Fuel Problem,” Guardian.co.uk, Feb. 13, 2010.] This is a significant achievement given that a year ago, it was reported that DARPA was able to produce oil from algae at a cost of $6-7 per gallon. [See William Matthews, “From Algae to JP-8: Pentagon’s DARPA Funds Efforts to Make a Green Jet Fuel,” DefenseNews, Jan. 5, 2009 and Michael Hoven, “DARPA:  Biofuel from Algae Could Cost Only $1 Per Gallon,” heatingoil.com, Feb. 15, 2010.]

DAPRA has been investigating the potential use of algae as a fuel-stock in its Biofuels: Cellulosic and Algal Feedstocks Program, which seeks to enable the efficient and economical production of military-grade jet fuel (JP-8) from agricultural and aquacultural products that are oil rich but not competitive with food supplies. [DARPA Military Biofuels Factsheet (Apr. 2009).] Algae meets these requirements and has other potential benefits such as its consumption of carbon dioxide as part of its growth process, and its ability to reproduce quickly in brackish or even polluted water. Algae oil has been successfully used as a fuel-stock for conventional jets. [See Katie Howell, “Is Algae the Biofuel of the Future?” ScientificAmerican.com, Apr. 28, 2009] DARPA's effort is in response to a congressional directive to the Department of Defense to reduce its reliance on foreign oil imports. Secretary of Defense Robert Gates has observed that the Department of Defense spent $12.6 billion on fuel in 2007, and estimated that it is "probably the largest single user of petroleum products in the world."

DARPA's ultimate goal is to facilitate mass-production of JP-8 at a cost of less than $3 per gallon at a production rate of 50 million gallons per year. DARPA's recent oil-extraction was achieved as part of phase one of the program, which seeks to demonstrate algae triglyceride production (a precursor to JP-8) at a projected cost of $2 per gallon. In the next phase, DARPA's contractors (General Atomics and Science Applications International Corp.) will attempt to demonstrate production of algae triglyceride at $1 per gallon and develop and demonstrate an affordable process for converting the algae triglyceride into biofuel.

— Sean Farrell, San Antonio, Texas

Council on Environmental Quality Proposes Modernization of National Environmental Policy Act

On February 18, 2010, the White House Council on Environmental Quality (CEQ) proposed steps to "modernize and reinvigorate" the National Environmental Policy Act (NEPA). NEPA, enacted in 1970, mandates that federal agencies consider the environmental impacts of their proposed actions and requires that the benefits and risks associated with proposed actions be assessed and publicly disclosed. Specifically, CEQ issued draft guidance for public comment on (a) when and how Federal agencies must consider greenhouse gas emissions and climate change in their proposed actions; (b) clarifying appropriateness of "Findings of No Significant Impact" and specifying when there is a need to monitor environmental mitigation commitments; (c) clarifying use of categorical exclusions; and (d) enhanced public tools for reporting on NEPA activities. These measures are designed to assist federal agencies to meet the goals of NEPA, enhance the quality of public involvement in governmental decisions relating to the environment, increase transparency, and ease implementation. The draft guidance is significant in that it will affect permitting an infrastructure by influencing the conditions under which federal agencies issue permits and approvals.

The most anticipated item is the draft guidance on consideration of the effects of climate change and greenhouse gas emissions. This is intended to help explain how federal government agencies should analyze the environmental effects of greenhouse gas when they describe the environmental effects of a proposed agency action. CEQ proposes that the NEPA process should incorporate consideration of both the impact of an agency action on the environment, greenhouse gas emissions, and climate change. Specifically, the guidance recommends that federal agencies consider climate change when the proposed action would lead to the release of 25,000 or more tons of greenhouse gases. The guidance affirms the requirements of Section 102 of NEPA and the CEQ Regulation for Implementing the Procedural Provisions of NEPA, 40 C.F.R. parts 1500-1508, and their applicability to greenhouse gas and climate change impacts.

The public comment period is 45 days for the revised draft guidance clarifying the use of categorical exclusion and is 90 days for the draft guidance on consideration of greenhouse gases as well as the draft guidance clarifying appropriateness of "Findings of No Significant Impact" and specifying when there is a need to monitor environmental mitigation commitments.

— Kristen W. Kelly and Darin L. Brooks Beirne, Houston, Texas

Settlement Reached on Wind Farm Project Affecting Endangered Indiana Bats

On January 26, 2010, the U.S. District Court for the District of Maryland approved a settlement agreement between Beech Ridge Energy LLC (Beech Ridge), an affiliate of Invenergy LLC, and certain environmental groups, which allows the Beech Ridge Wind Energy project, a wind farm project, in Greenbrier County, West Virginia, to move forward on a smaller scale.

In June 2009, environmental group Animal Welfare Institute and Mountain Communities for Responsible Energy (MCRE) sought a preliminary injunction to halt the wind farm project while the court determined whether the project was harmful to the Indiana bat, an endangered species under the Endangered Species Act (ESA). In December 2009, the U.S. District Court for the District of Maryland ruled that the wind farm project would imminently harm, kill, or wound the endangered Indiana bats during the spring, summer, and fall, in violation of the ESA. This was the first federal court ruling in the country to find a wind power project in violation of federal environmental law. The court ordered Beech Ridge to temporarily halt construction of the project. Beech Ridge appealed.

In reaching a settlement with the environmental groups, Beech Ridge has reduced the number of wind turbines from 122 turbines to 100 turbines and has agreed to an extended construction timeline. Under the settlement agreement, Beech Ridge may immediately construct 67 turbines (enough to create 100 megawatts of power) but must restrict the wind harvest to certain seasons when the Indiana bats are hibernating and times of day when the bats are not active. Pending the receipt of an incidental take permit from the U.S. Fish and Wildlife Service, Beech Ridge will be allowed to construct an additional 33 turbines and operate the facility at all hours year round. The first 67 turbines should be operational before the end of the year.

The Animal Welfare Institute, MCRE, and local residents have agreed not to challenge the project again in state or federal court, and Beech Ridge has dropped its appeal.

— Linda Tsang, Washington D.C.

API Files Suit to Enjoin Enforcement of Renewable Fuels Blending Act of 2009

The American Petroleum Institute (API) filed suit on December 18, 2009, in the U.S. District Court for the Middle District of Tennessee (Am. Petroleum Inst. v. Givens, 3:09-cv-01195 (M.D. Tenn. Dec. 18, 2009)), seeking an injunction blocking enforcement of the Tennessee Renewable Fuels Blending Act of 2009 (the Act). TENN. CODE ANN. § 47-25-2001 et seq.

The Act was signed into law by Governor Bredesen on June 25, 2009, and went into effect on January 1, 2010. The Act requires refiners and other petroleum fuel producers and suppliers in the state to make and sell unblended gasoline and diesel to wholesalers. In addition, the unblended fuel must be suitable for blending with biofuels. The Act also prevents contracts between a wholesaler and a refiner or fuel supplier from restricting the wholesaler's ability to blend petroleum products with ethanol or biodiesel. According to a fiscal analysis conducted by the Tennessee legislature, in 2008 major oil company suppliers began preventing Tennessee businesses from blending ethanol and instead sold only pre-blended products, effectively shifting income and profits away from certain Tennessee petroleum wholesalers to out-of-state suppliers.

In its lawsuit, the API claims that the Act is preempted by the federal Renewable Fuel Standard (RFS), the Lanham Act, and the Petroleum Marketing Practices Act. The RFS allows refiners to choose whether and how to blend gasoline or diesel with renewable fuels. The Lanham Act grants trademark holders the right to exclude others from using their trademark. The Petroleum Marketing Practices Act contains a preemption provision that voids any state law that narrows the grounds for termination or nonrenewal of a petroleum marketing franchise agreement.

The API also argues that the Act violates the Commerce Clause of the U.S. Constitution because it "discriminates against, and impermissibly burdens interstate commerce by favoring local distributors and retailers at the expense of out-of-state refiners."

— Linda Tsang, Washington D.C.

Massachusetts Seeks to Make Solar Power Economically Feasible with Ambitious Solar Power Initiative

Massachusetts is placing a high priority on making solar power a viable alternative to non-renewable energy. Governor Deval Patrick's solar power initiative provides the people and businesses strong incentives to become solar power operators. These incentives include subsidies, rebates, and, in the near future, an option to sell surplus solar-generated energy. The initiative aspires to see 250 megawatts of solar-generating capacity in place by 2017.

On December 14, 2007, Governor Patrick introduced Commonwealth Solar, a program earmarking $68 million in rebates for the installation of solar panels. The program appeared more ambitious than initially contemplated, spending all of the funding in the first 22 months instead of the slated three to four years. Commonwealth Solar exceeded expectations from a developmental standpoint, however. The initiative funded 208 commercial solar projects, creating 10.3 megawatts worth of solar capacity, and will subsidize over 12,000 solar projects by the time all the applications are processed.

— Liz Klingensmith and Ben Allen, Houston, TX

Department of Energy Announces $3.4 Billion in Grants to Develop Nation's "Smart Grid"

On October 27, 2009, the U.S. Department of Energy announced the recipients of $3.4 billion in federal grants for smart-grid projects throughout the nation. The grants, funded under the 2009 Stimulus Act, will be matched by industry investment for a total public-private investment of $8.1 billion. The funds will support approximately 100 projects in 45 different states and are intended to "spur the nation's transition to a smarter, stronger, more efficient, and reliable electric system." Press Release, The White House Office of the Press Secretary, President Obama Announces $3.4 Billion Investment to Spur Transition to Smart Energy Grid (Oct. 27, 2009).

While the overarching goal of the grants is to modernize the country's energy distribution systems, there are a variety of projects that fall under the category of smart-grid projects. These include the installation of digital thermostats, digital in-home energy management displays, and advanced transformers and load management devices. However, the most common type of project is the installation of approximately 18 million electrical meters, known as smart meters, which have the ability to identify electricity consumption in more detail and transmit this information electronically back to the utility.

— Kris Kavanaugh, Birmingham, Alabama

FTC Issues Final Rule Prohibiting Petroleum Market Manipulation

In a 2-1 vote on August 6, 2009, the Federal Trade Commission (FTC) issued a final rule aimed at prohibiting fraudulent and deceitful manipulations in petroleum markets. 6 C.F.R. § 317 (2009) The rule covers the wholesale purchase and sale of crude oil, gasoline, and petroleum distillates, and prohibits persons from directly or indirectly (1) knowingly engaging in acts that would operate as a fraud or deceit upon any other person (including making untrue statements of material facts), or (2) intentionally failing to state a material fact that under the circumstances would render the person's statement misleading (provided the omission distorts or is likely to distort market condition). Examples of targeted conduct include false public announcements of planned pricing decisions and false statistical reporting. New FTC Rule Prohibits Petroleum Market Manipulation, Federal Trade Commission.

Violations of the rule carry stiff civil penalties of up to $1 million per violation, per day, in addition to any other relief available to the Commission under the FTC Act. This stands in contrast to the $11,000 per violation penalty under the FTC Act for other forms of unfair or deceptive acts. Following announcement of the rule's issuance, Chairman Jon Leibowitz promised: "We will police the oil markets-and if we find companies that are manipulating the markets, we will go after them."[3]

— Corey F. Wehmeyer, San Antonio, Texas

The American Clean Energy and Security Act of 2009

ACES was narrowly approved on June 29, 2009, in the House Representatives by a vote of 219 to 212, and if the voting pattern in the House is any predictor, odds are in favor of another highly contested battle in the Senate. The text of ACES is organized in four parts: clean energy, energy efficiency, global warming, and transitioning.

Proponents of ACES say that the clean energy part of the act promotes renewable sources of energy and carbon capture and sequestration technologies, low-carbon transportation fuels, clean electric vehicles, and the smart grid and electricity transmission. Energy efficiency is designed to influence all sectors of the economy, including buildings, appliances, transportation, and industry. Global warming places limits on the emissions of heat-trapping pollutants. ACES advocates say that the transitioning part of ACES protects U.S. consumers and industry and promotes green jobs during the transition to a clean energy economy.

— Benjamin L. Bosell, San Antonio, Texas

Interior Secretary Cancels Utah Oil and Gas Leases after Judge Grants TRO in Favor of Environmental Groups

On February 4, 2009, U.S. Department of the Interior Secretary Ken Salazar canceled the sale of oil and gas leases on 77 parcels of federal land in Utah, following U.S. District Judge for the District of Columbia Ricardo M. Urbina's issuance of a temporary restraining order (TRO), which postponed the final sale transactions and paved the way for Interior to withdraw them. The TRO was issued in the context of pending litigation brought by several environmental groups (Plaintiffs) against Interior's Assistant Secretary for Lands and Minerals Management and the Deputy State Director of the Bureau of Land Management's Utah Office (BLM) (collectively Interior Defendants), as well as Utah state entities and purchasers of the leases which later intervened in the suit (Producers). Southern Utah Wilderness Alliance, et al. v. Stephen Allred, et al., No. 1:08-CV-02187-RMU (D. D.C. filed Dec. 17, 2008).

The Plaintiffs' Complaint seeks declaratory and injunctive relief, citing concerns about oil and gas development on the federal lands harming air and water quality and natural quiet in several alleged wilderness areas, including the Arches National Park, Canyonlands National Park, Desolation Canyon and Dinosaur National Monument and alleges the BLM failed to follow proper procedures in identifying lands appropriate for oil and gas development in violation of the Federal Land Policy and Management Act (FLPMA), the National Environmental Policy Act ("NEPA"), the National Historic Preservation Act (NHPA) and Interior Secretary Order No. 3226, which requires the consideration of climate change in administrative decisions (the lawsuit). The leases, worth an estimated $6 million, were sold this past December by the BLM during its quarterly oil and gas lease sale (required under the Mineral Leasing Act, as amended by the Federal Onshore Oil and Gas Leasing Reform Act of 1987). 30 U.S.C. § 226(b)(1)(A) (2008). In rejecting the sale of the contested parcels, Salazar acknowledged the need to develop the nation's oil and gas supplies in a responsible way, though the move was criticized by some as limiting economic development of the West.

Obama-Biden Comprehensive New Energy for America Plan and the "Green Dream Team"

As Barack Obama was sworn in as the 44th US President on January 20, his administration announced the Obama-Biden Comprehensive New Energy For America plan. The plan is aimed at the primary objectives of (1) ending our dependence on foreign oil, (2) addressing global climate change, (3) investing in alternative and renewable energy, and (4) creating millions of new jobs. These objectives are all intertwined, with the common denominator being our nation's reliance on fossil fuels for energy.

— Paul Dickerson and Rochelle Seade, Haynes and Boone, LLP